Project on consumption and saving for the DWP – comparative analysis of consumption and saving in the UK and US

Pub. Date
03 November, 2009
Pub. Type

In this note we compare consumption behaviour in the US and the UK with a special focus on the scale of, and differences in, the impacts of changes in income, financial and housing wealth, both over time and between countries. It is common to claim that theory tells us housing wealth is not wealth, and hence it should not impact on consumption. We investigate these issues first by searching for patterns of cointegration and causality between consumption, income and wealth in the UK and the US. Using these results we investigate the effects of changes in asset prices on consumption in the UK and the US using the National Institute Global Model, NiGEM under different sets of assumptions. A temporary 10 percent fall in the price of houses will in both countries increase the savings ratio by around 1 percentage point, with the effect being marginally larger in the UK than the US. It is relatively clear from the data, but not from theory, that a permanent change in real house prices will have a similar effect on the saving ratio. Hence a 30 per cent fall in real house prices in either country would raise saving by around 1_ percentage points. The effects of a fall in equity prices of a similar magnitude would have about a sixth of the effects, as we would expect from estimated equations.