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An investigation of the Norwegian consumption function : income distribution and wealth effects

Landsem, Jørgen
Master thesis
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URI
http://hdl.handle.net/11250/2403312
Date
2016-09-01
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  • Master Thesis [4656]
Abstract
Since the financial crisis, Norwegian private consumption has fallen as a

share of disposable income. This weak development in consumption was not

predicted by the contemporaneous consumption models and led to a “structural

breakdown” of these models. This master’s thesis will attempt to build

a new model for aggregate consumption that is better able to explain the

developments since the financial crisis. This is done by using cointegration

analysis to estimate a long run relationship and then include this in an error

correction model for private consumption. With a basis in the current consumption

function in Statistic Norway’s KVARTS model, I first show the

breakdown of the contemporaneous model and then conduct two separate

analyses into possible explanations for the breakdown. First, I find that the

income distribution, measured by a Gini coefficient or the wage share, do

not seem to affect household consumption on the aggregate level. Second,

I split the wealth variable present in the current model into different components.

In the long run, including net housing wealth and net financial

wealth separately seems to improve the model. Financial wealth is a larger

determinant of household consumption in the long run than housing wealth.

In the short run, the degree of liquidity affects the effect of financial wealth

on consumption, while controlling for short run dynamics of debt does not

improve the model.

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