infonet-economy

When assessing the effect of changes in wealth on household expenditures, most empirical studies have used cointegration-based approaches. These approaches rely on the existence of a stable long-run relationship among consumption, wealth and income. However, in Switzerland no such relationship seems to be present after 2001. Motivated by this issue, this paper applies a recently suggested approach to estimating long-run wealth effects on consumption that does not rely on cointegration. This new approach relies on sticky consumption growth, which can be motivated by consumption habits or sticky expectations. In both cases, long-run wealth effects are the result of short-run reactions of households to changes in wealth which become long-lasting. Using this methodology, the estimated wealth effects on consumption in Switzerland are larger than suggested by cointegration-based estimates. Furthermore, the results show that there seems to be a remarkably high degree of consumption stickiness in Switzerland.