How real estate and business cycle affect the household’s propensity to consume.

Abstract

How do shocks in the households’ housing and financial wealth affect their consumption? To answer this question we examine the results of previous researches and build our analysis by using the data on the balance sheet and consumption of 18 countries of the Euro area from 2006 to 2020. We estimate the MPC for different categories of goods by durability through the multiple linear regression model and explain how the Covid-19 pandemic affected it. We find that the MPCs out of housing wealth fall in the range of 4.5 - 4.82 cents, while the MPCs out of financial wealth range from 2.84 to 3.34 cents. The addition of the financial wealth to regression, though, lowers sensibly the value of the MPC, due to the correlation between the two of 0.41. We also show that the sluggishness of consumption’s adaptation affects importantly the timing of people’s response to wealth shocks and then the MPC itself.