Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240482 
Year of Publication: 
2020
Series/Report no.: 
IFN Working Paper No. 1339
Publisher: 
Research Institute of Industrial Economics (IFN), Stockholm
Abstract: 
This paper investigates the impact of financial liberalization on the relationship between consumption and total wealth (i.e., the sum of asset wealth and human wealth). We propose a heterogeneous agent framework with incomplete markets where financial liberalization, by signalling a future reduction in the incomplete markets component of consumption growth, increases the current consumption-wealth ratio. From the model, an aggregate long-run relationship is derived between consumption, total wealth and financial liberalization which is estimated by state space methods using quarterly US data. The results show that the trend in the consumption-wealth ratio is well-captured by our baseline liberalization indicator. We find that the increase in this indicator over the sample period has increased the consumption-wealth ratio with about ten to sixteen percent. Additional estimations suggest that financial liberalization has predictive power for aggregate consumption growth, a result that provides support for the incomplete markets channel put forward in the paper.
Subjects: 
Consumption
Wealth
Financial liberalization
Incomplete markets
State space model
JEL: 
E21
C32
C11
Document Type: 
Working Paper

Files in This Item:
File
Size
708.6 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.