Aggregate consumption and wealth in the long run: The impact of financial liberalization

Malin Gardberg*, Lorenzo Pozzi

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review


This paper investigates the impact of financial liberalization on the relationship between consumption and total wealth (i.e., the sum of asset wealth and human wealth). Financial liberalization is persistent and may signal changes in expected future consumption growth rates and/or in rates of return on wealth that, through the intertemporal budget constraint, affect the current consumption–wealth ratio. We estimate the long-run relationship between consumption, total wealth, and financial liberalization by state space methods using quarterly US data. The results show that the trend in the consumption–wealth ratio is well-captured by our baseline liberalization indicator. We find that the increase in this indicator over the sample period has increased the consumption–wealth ratio with about 10%. Investigating the responsible channel, additional estimates show that financial liberalization has predictive power for aggregate consumption growth rather than for returns, a result that supports an incomplete markets interpretation of the link between liberalization and the consumption–wealth ratio.

Original languageEnglish
Pages (from-to)161-186
Number of pages26
JournalJournal of Applied Econometrics
Issue number1
Early online date4 Oct 2021
Publication statusE-pub ahead of print - 4 Oct 2021

Bibliographical note

Funding Information:
For constructive comments and suggestions, we thank the co‐editor and three anonymous referees. We further thank Gerdie Everaert, Massimo Giuliodori, Vadym Volosovych, and Agnieszka Markiewicz for useful comments on previous versions of the paper. Malin Gardberg thanks Jan Wallanders och Tom Hedelius stiftelse samt Tore Browaldhs stiftelse (W19‐0030) and the Marianne and Marcus Wallenberg Foundation for financial support.

Publisher Copyright:
© 2021 John Wiley & Sons, Ltd.


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