An Integrated Model of the Portfolio Behaviour of the Canadian Household Sector: 1968-1983

An econometric model of the portfolio behaviour of the Canadian household sector is developed to study the linkages between demands for financial assets. The theoretical basis for the model is a version of the well-known Brainard-Tobin framework, which is extended to integrate the consumption-savings and portfolio-allocation decisions. This integration allows joint estimation of the real expenditure and asset- demand equations as well as empirical testing of the importance of the sector's real-financial linkages. The model consists of nine equations: three real expenditure equations, four asset equations, and two liability equations. These are estimated using quarterly data over the period 1968-83. Where appropriate, the assets are measured in market-value terms.

Empirical support is found for integration, for the purposes of modelling both real expenditures and portfolio allocations. Also, the model possesses properties that are broadly consistent with the stylized facts. These include: (1) a general rise in nominal interest rates and expected inflation results in only minor portfolio adjustments, while (2) a general rise in real interest rates leads to a reduction in the magnitude of both sides of the balance sheet, and (3) a rise in expected inflation causes an increase in real expenditures financed through an increase in liabilities. As is frequently the case with this class of model, however, the individual parameter estimates and therefore the responses of the model of individual interest rate shocks are of mixed quality.