Consumption, Financial and Real Wealth in the G-5 (revised December 2004)

Financial assets are generally chosen for encapsulating wealth effects in empirical work on aggregate consumption, but there is growing interest in tangible wealth, notably housing, as a potential determinant. We estimate consumption functions for the G-5, country-by-country and on a panel basis, which encapsulate roles for both tangible and financial wealth. Results suggest that tangible wealth plays a distinctive role in the determination of consumption in the short- and long-run. We also detect a marked negative effect of real interest rates. Results are of particular relevance to monetary policy, as well as being of importance for modelling and forecasting.