Housing And Financial Wealth, Financial Deregulation, And Consumption - The Swedish Case

We investigate the effects of using wealth disaggregated as housing and net financial wealth in a consumption function based on the life-cycle hypothesis. Error correction models and data for Sweden 1970-1992 are used in the empirical analysis. Unit root tests indicated that consumption, income and wealth were all integrated of order one and that the variables cointegrate if wealth is disaggregated. In dynamic modeling it was found that financial wealth is crucial in explaining consumption. Inclusion of wealth in disaggregated form improved the models significantly. The change in household debt was an important determinant of short-run consumer behaviour indicating that households have been credit-constrained. There was evidence that the recent dramatic increase in savings is a consequence of the tax reform in the early 1990s.