Working Paper: CEPR ID: DP8800
Authors: Janine Aron; John Muellbauer
Abstract: There is widespread disagreement about the role of housing wealth in explaining consumption. This paper exploits liquid and illiquid wealth time series from household balance sheet data for South Africa, previously constructed by the authors, to explain fluctuations in the ratios of consumption and household debt to income in South Africa, from 1971 to 2005. The paper emphasizes the role of substantial credit liberalization and of wealth, treating credit conditions as a latent variable with key interactions with drivers of consumption and debt. Credit conditions are proxied by a spline function entering jointly estimated consumption, debt and income expectations equations in a 'latent interactive variable equation system' (LIVES). The empirical results corroborate the theory in the paper, confirming that consumption relative to income is driven by credit liberalization, fluctuations in a range of asset values and asset accumulation, uncertainty and income expectations, inter alia. The paper confirms a collateral interpretation of housing wealth on consumption as opposed to a life-cycle interpretation. The paper also throws important light on the monetary policy transmission mechanism in South Africa.
Keywords: consumption; credit conditions; credit market liberalisation; household debt; housing collateral; housing wealth; liquid and illiquid wealth
JEL Codes: C52; E21; E27; E32; E44; E51; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit liberalization (F65) | reduces credit constraints (G51) |
| reduces credit constraints (G51) | facilitates consumption smoothing (D15) |
| credit liberalization (F65) | facilitates consumption smoothing (D15) |
| credit conditions (F34) | consumption (E21) |
| MPC out of housing wealth (G59) | consumption (E21) |
| asset values (G32) | consumption (E21) |
| income expectations (J31) | consumption (E21) |
| credit conditions (F34) | asset prices (G19) |