Revisiting the Consumption-Wealth Nexus: A Nonparametric Exploration
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Abstract
This study investigates the relationship between non-durable consumption and asset prices in 12 developed and 11 emerging economies, members of the European Union, emphasising the presence of nonlinearities through a nonparametric framework. Utilising the Categorical Regression Splines (CRS) approach, the analysis challenges traditional parametric models by allowing data to dictate the functional form of the relationship. The findings reveal distinct consumption-wealth dynamics: income remains the key driver in the emerging economies sample, with stock market fluctuations exhibiting potentially non-linear effects. Furthermore, consumption is primarily income-driven, with housing wealth playing a more pronounced role due to less-developed mortgage and financial markets in these emerging economies. Money wealth effects vary in significance, depending on the economic context and time period. These results underscore the advantages of nonparametric methods in accurately capturing complex economic relationships, providing insights for policymakers in designing effective strategies to support household consumption and economic stability.
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