Housing and Financial Wealth, Financial Deregulation and Consumption - The

The effects of using wealth disaggregated as housing and net financial wealth are investigated in an error-correction consumption function model. Data for Sweden 1970-1992 are used in the analysis. Unit root tests indicate that consumption, income and wealth are all integrated of order one and that the variables cointegrate if wealth is disaggregated. Financial wealth is crucial in explaining consumption, and wealth in disaggregated form improves the models significantly. Household debt is an important determinant of short-run behavior indicating credit rationing. There is also evidence that the observed dramatic increase in savings is a consequence of the recent tax reform.