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Housing Wealth, Financial Wealth and Consumption in China
Author(s) -
Chen Jie,
Guo Feng,
Zhu Aiyong
Publication year - 2009
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/j.1749-124x.2009.01150.x
Subject(s) - cointegration , consumption (sociology) , economics , wealth effect , asset (computer security) , variance decomposition of forecast errors , china , variance (accounting) , shock (circulatory) , econometrics , random walk , vector autoregression , permanent income hypothesis , monetary economics , market liquidity , statistics , mathematics , geography , medicine , monetary policy , computer security , accounting , sociology , computer science , archaeology , social science
The paper investigates the relationship between changes in asset wealth and the trend movements of household consumption in urban China. Using the vector error correction cointegration model, we demonstrate that there is a unique long‐run cointegrating relationship between household consumption, disposable income, financial wealth and housing wealth in urban China. We find that housing wealth is the only factor that restores the long‐run equilibrium relationship when the cointegrated system is disturbed by an external shock. In addition, our permanent–transitory variance decomposition analysis indicates that nearly all variance in the movement of consumption is permanent, supporting the classical random walk hypothesis of consumption behavior. However, a large proportion of variance in the short‐run movements of housing wealth is found to be transitory.