Debt dynamics and excess sensitivity of consumption to transitory wealth changes

Emmanuel De Veirman and Ashley Dunstan
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Ashley Dunstan: Reserve Bank of New Zealand, http://www.rbnz.govt.nz

No DP2010/09, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: We analyse the consumption-wealth relationship using a framework that accounts for transitory variation in wealth, and in a setting where transitory variation in household net worth is not dominated by boom and bust cycles in stock markets. We find that transitory variation in consumption depends positively on recent transitory changes in wealth. In addition, we find that gross asset wealth and household debt are positively related. Both findings constitute departures from standard lifecycle/ permanent income hypothesis theory with complete financial markets, but can be explained by the introduction of liquidity constraints.

JEL-codes: C22 C32 E21 (search for similar items in EconPapers)
Pages: 43 p.
Date: 2010-10
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Debt Dynamics and the Relationship Between Consumption and Cyclical Wealth Changes (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:2010/09

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