Asymmetric Wealth Effects on Consumption: A Threshold Cointegration Approach on Swedish Households

Abstract: Recognising the macroeconomic importance of private consumption, this thesis aims at examining possible forces that drive changes the level of households’ consumption. I do so by analysing the relationship of housing wealth, financial wealth, and consumption of households in Sweden in the short and long run. Using an M-TAR approach I find evidence for cointegration of these variables. Housing wealth and financial wealth appear to have positive effects on total consumption in the long run. Consumption is the error-correcting variable in the short run. However, without taking control variables into account, asymmetric disequilibrium adjustment cannot be verified significantly. Introducing broad money supply, to control for financial market conditions, results in weak evidence for the existence of asymmetric adjustment of total private consumption. Overall, housing wealth effects and financial wealth effects seem to play an important role in explaining changes in the level of consumption, and thus are of relevance for policymakers in the macroeconomy.