Private consumption-savings behavior and macroeconomic imbalances

Abstract

Between the signing of the Maastricht Treaty in 1991 and 2007 many of the existing macroeconomic theories were applied to support the claim that the euro area was an optimal currency union and to argue that increasing macroeconomic imbalances were a logical part of the financial integration process. However, since the sovereign debt crisis of southern European countries in 2010 there have been serious concerns as to what degree divergence among European countries is acceptable. In this thesis I evaluate an important source of these imbalances: the national savings-consumption and borrowing-lending decisions of households, including cultural and institutional characteristics. I account for three issues that I believe have been insufficiently recognized so far. First, I explicitly account for cultural, structural and institutional heterogeneity as determinants of private saving and of private consumption imbalances among developed countries in general, and more specifically among euro area countries. Second, I investigate the role of wealth defined as housing wealth, financial wealth and the components of financial wealth (debt, pension wealth and equity) on consumption. Third, I analyze individual price expectations in a low-inflation environment. This thesis contributes five innovative aspects to the current literature. First, the empirical literature on the determinants of private saving has extensively looked at macroeconomic variables, without actually studying the impact of cross-country cultural heterogeneities. I document the euro area macro imbalances and show that differences in private savings are also associated with the degree of thrift, trust and religiosity of the country. Second, the economic literature has a long tradition of empirically evaluating the life cycle hypothesis by measuring the size of the wealth effect on consumption, next to that of income, the so-called marginal propensity to consume from wealth. Usually the marginal propensity to consume is treated as homogenous in theory and most empirical applications. In my thesis, I introduce the effect of country-structural factors into the relation between wealth and consumption. More specifically, I discuss the effects of planning horizon, borrowing constraints and market completeness. I find that all three structural factors affect the way financial and housing wealth are translated into consumption. Third, while recent studies emphasize the different effects of financial wealth and housing wealth on consumption as discussed above, I go one step further by measuring the effect of the different components of financial wealth on consumption for a few countries of the European Union. Afterwards, I link the size and the effects of the different financial wealth components to the pension system of the country. My finding is that in countries with a mandatory pension system, individuals have less liquid assets and tend to finance their consumption through loans. In countries with a voluntary pension system, individuals are able to consume straight away from their available liquid assets. The last major contribution of my dissertation focuses on evaluating heterogeneities regarding individual characteristics while controlling for macroeconomic factors that are linked with inflation expectations. The novelty is that I evaluate these effects when the economic environment is exceptional -- i.e. characterized by low inflation.