Wealth effects on consumer spending in Malta : stock and housing market channels

Abstract

The economic significance of the Maltese asset markets has gained considerable interest over the past few decades. The primary objective of this dissertation is to examine the nature and magnitude of the relationship between the two main forms of wealth (housing and financial) in the Maltese economy and four categories of household spending, which include total consumption (TC), spending on durable goods (DC), nondurable goods consumption (NDC), and the consumption of services (SC). This study intends to build on the wealth of existing international literature on the topic while addressing a literature gap that exists for the Maltese economy. This time-series study employs Maltese quarterly data from 2000 to 2021. Given the stationarity properties of the selected variables, an Auto-Regressive Distributed-Lag (ARDL) econometric framework was applied to identify the Short-Run (SR) dynamics of the functions. Through the use of Eviews software, knowledge on the speed of adjustment of the explanatory variables from the SR to the LongRun (LR) was also acquired. The main regression results show that in the SR, Maltese households prefer to smooth out consumption over time, while higher valuation of financial assets leads to higher spending for all consumption categories. In the SR, growth in housing prices is associated with lower levels of total and non-durable goods consumption. In turn, rising house valuations tend to boost spending on services and on durable goods in the SR. Moreover, findings show that Maltese households decrease spending around eight quarters following an interest rate hike. Furthermore, apart from spending on services, a LR equilibrium is present between all the remaining categories of consumption and the explanatory variables used in this study. Due to the consistent, strong and positive linkages observed between labour income, stock market wealth and household consumption, it is concluded that expansionary policies directed at generating growth in the returns on assets in the Maltese financial markets, as well as policies incentivising growth in employee compensation, directly lead to higher overall spending. On the other hand, given that findings on interest rate elasticity suggest that higher interest rates mostly affect spending in the markets for durable and non-durable goods, monetary policymakers could target such markets when adopting a tight policy stance during times of economic overheating. Nonetheless, results on the housing wealth elasticity suggest that the savings required for property purchasing and loan repayments by Maltese households tend to impact daily consumption decisions.