WEALTH EFFECTS ON CONSUMPTION HOUSING WEALTH VERSUS FINANCIAL WEALTH

The purpose of this thesis is to investigate and compare the effects of changes in financial wealth and housing wealth on private consumption in Sweden. On the basis of theory and previous research, a base-case error-correction model containing consumption, income, financial wealth, and housing wealth is estimated on quarterly data over the period 19802004. The base-case model is then altered by using different measures of consumption as well as by including additional explanatory variables. The main findings are that, in contrast to previous research, the long run elasticity of consumption with respect to financial wealth is higher than the corresponding elasticity for housing wealth. On the contrary, in the short run, the elasticity of consumption with respect to housing wealth is substantially greater than the elasticity with respect to financial wealth. The income elasticity of consumption is noticeably lower than expected in both the long run and the short run.