Wealth, Disposable Income and Consumption: Some Evidence for Canada

The author develops a measure of aggregate private sector wealth in Canada and examines its ability to explain aggregate consumption of non-durables and services. This wealth measure includes financial, physical and human wealth.

The author measures human wealth as the expected present value of aggregate labour income, net of government expenditures, based on a discrete state-space approximation of an estimated bivariate vector autoregression for the real interest rate and the growth rate of labour income, net of government expenditures. His general approach to measuring financial and physical (non-human) wealth is to consolidate the assets and liabilities of the various sectors of the economy so as to measure the net worth of the ultimate owners of private-sector wealth—households. To the extent possible, the author measures non-human wealth at market value.

The relationship between consumption and wealth is explored as a means both of gauging the usefulness of the wealth measures developed in this report and of improving on empirical consumption models for Canada. The principal empirical finding is that both wealth and disposable income are important determinants of consumption. Including wealth in the consumption function is particularly helpful in explaining the consumption boom of the late 1980s.