Working Paper: CEPR ID: DP18597
Authors: Riccardo De Bonis; Danilo Liberati; John Muellbauer; Concetta Rondinelli
Abstract: Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the ‘representative household’ owns only an aggregate form of wealth, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is substantially offset by the negative effect of affordability measured by the house price-to-income ratio.
Keywords: financial wealth; liquid and illiquid assets; permanent income; housing wealth
JEL Codes: E21; E32; E44; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity of assets (E41) | consumption (E21) |
| housing wealth (G51) | consumption (E21) |
| housing affordability (R31) | consumption (E21) |
| housing wealth (G51) | MPC from housing wealth (G59) |
| conventional aggregate consumption function (E21) | rejection (Y60) |