Testing the life cycle and permanent income hypothesis: an investigation on the role of wealth in stimulating consumption in the Philippines
Date
2008-03
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Abstract
The Philippine economy is highly characterized as consumption-driven. It is therefore important to examine the factors that affect consumption behavior. This study explores the wealth effects of residential and stock assets on aggregate spending in the light of the most recent consumption models, Permanent Income Hypothesis and the Life Cycle Hypothesis. The results indicate a higher residential wealth effect with a substantially larger marginal propensity to consume than stock wealth. Housing wealth was also found to be most influential on the consumption of all types of goods while stock wealth was significant only in explaining spending on furniture. The equity extractions from residential and stock wealth were also examined to further test the wealth effect on consumption. Equity extractions were found to have significant impact on the growth of residential and financial wealth with rent and last-quarter financial wealth as the main explanatory variables. Lastly, the consumption behavior of Overseas Filipino Workers was found to be consistent with the Life Cycle Hypothesis as shown by the high saving rates and investment in housing, stocks and business capital.
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Keywords
Wealth, Income, Savings, Consumption behavior, Wealth effect, Stock asset, Income hypnothesis