Housing, Household Portfolio, and Intertemporal Elasticity of Substitution: Evidence from the Consumer Expenditure Survey

This paper investigates whether the inclusion of housing in a household portfolio is important to the household’s intertemporal decision making. Households hold portfolios of assets rather than a Treasury bill and/or a stock index and make their spending decisions based on expected total returns of an array of assets. The total returns account for capital gains, taxes, and inflation. In addition to financial assets such as stocks and bonds, we incorporate a real asset, residential housing, into a household portfolio. In particular, we estimate the intertemporal elasticity of substitution (IES), that is, how a change in asset or portfolio return affects household’s consumption growth, using a sample of households from the Consumer Expenditure Survey. Since changes in housing return can affect consumption of households over time, we investigate whether the inclusion of housing in the household portfolio provides different IES estimates. Moreover, utilizing a household-level data set, we estimate IES parameters for different groups of assetholders. Our results indicate that the housing return positively affects consumption growth, and housing is an important asset to account for in the household portfolio.intertemporal elasticity of substitution, intertemporal choice, consumption, housing, household portfolio

The volatility trap: why do big savers invest relatively little?

The more a country saves, the less it invests as a share of saving. We build a “store-or-sow” model of growth with precautionary saving and investment to study the nonlinear relationship between investment and saving. We contend that income volatility is an important variable for explaining saving and investment dynamics. Our results indicate that as permanent volatility increases, both investment and saving increase until a threshold at which point investment plummets while precautionary saving surges. In contrast, with larger volatility of temporary shocks, investment falls and precautionary saving gradually increases. Faced with high permanent volatility, big savers invest relatively little.volatility, precautionary saving, buffer-stock, investment

Measuring and Analyzing Returns on Aggregate Residential Housing

This paper computes an aggregate real after-tax rate of return on residential real estate in the United States. We account for net rental income, capital gain, and subsidies due to tax provisions for homeowners in constructing a total return measure. We also compute separate returns to owners and rentiers (that is, households who rent to others). Both quarterly and annual data over 1952-2000 period are used in the analysis. We compare our measure of return with that in the literature and analyze how housing compares to other assets in the household portfolio. Our approach provides a more comprehensive measure of return than that found in the literature. We confirm that residential housing provides a high average return and low volatility, has low correlation with other assets such as stocks and bonds, and exhibits high positive correlation with inflation. The efficient frontier analysis shows that the residential housing providing diversification should be an important part of the household portfolio. Our results also indicate that housing may be as good an investment as stocks (S&P 500).housing return, measurement, efficient frontier, household portfolio

The Rate of Interest or the Rate of Return: Estimating Intertemporal Elasticity of Substitution

This paper investigates whether the rate of interest such as the Treasury bill rate or the rate of return such as the return on a household portfolio is more relevant to the household’s intertemporal decision making. In a current era, households are diversifiers (to use Tobin’s 1958 term) and hold portfolios of assets rather than a simple loan. A portfolio of assets earns a composite return accounting for capital gains, taxes, and inflation, and rational agents make spending decisions based on expected total returns on a portfolio rather than on the return on a single asset. The total composite measure we use includes financial assets such as stocks and bonds and a real asset, residential housing. In particular, we estimate the intertemporal elasticity of substitution, namely, how a change in the asset or portfolio return affects household’s consumption growth. The estimates obtained using real after-tax composite return are about 0.15-0.3 and are more robust to linear and nonlinear estimations, different consumption measures, and various time periods than those obtained by using individual asset returns such as the Treasury bill rate.intertemporal elasticity of substitution, intertemporal choice, consumption, housing, portfolio return

Public Debt Dynamics and Debt Feedback

We study the dynamics of U.S. public debt in a parsimonious VAR. We find that including debt feedback ensures the stationarity of debt while standard VARs excluding debt may imply an explosive debt path. We also find that the response of debt to inflation or interest shocks is not robust and depends on the policy regime. The recent past suggests that a positive shock to inflation increases debt while the same to interest rate decreases it. Positive shocks to growth and primary surplus unambiguously reduce debt.debt, fiscal policy, growth, VAR, generalized impulse responses

Charting the long-term impact of economic ideas – the rise and fall of growth narratives

The ways in which academics and researchers develop narratives to operationalize key concepts in their field can have significant impacts. Taking the example of economic research, Reda Cherif and Fuad Hasanov explore the formation and diffusion of economic growth narratives and discuss what this reveals about the role of ideas in shaping socio-economic change

La creación de campeones de la industria electrónica en Asia oriental

Sustained and high growth in East Asia was achieved by developing sophisticated export sectors, especially in electronics, spearheaded by national “champions.” Using the experience of four major East Asian semiconductor firms, we argue that four ingredients of state-firm cooperation were instrumental in their success—ambition, autonomy, accountability, and adaptability (4A). This state-firm interaction involved ambitious goals and policies of the state combined with firms’ operational autonomy, strict accountability for the support received, and adaptability to the changing environment. In addition, international and domestic competition, collaboration with multinationals and research consortiums, and own innovation pushed firms toward the technological frontierEn Asia oriental se logró un crecimiento sostenido y elevado mediante el desarrollo de sofisticados sectores de exportación, especialmente en electrónica, encabezados por “campeones” nacionales. Utilizando la experiencia de cuatro importantes empresas de semiconductores de Asia oriental, argumentamos que cuatro ingredientes de la cooperación entre empresas y Estado fueron fundamentales para su éxito: ambición, autonomía, rendición de cuentas y adaptabilidad. Esta interacción entre el Estado y la empresa implicó ambiciosos objetivos y políticas por parte del estado, combinados con la autonomía operativa de las empresas, una estricta rendición de cuentas por el apoyo recibido y la adaptabilidad al entorno cambiante. Además, la competencia nacional e internacional, la colaboración con multinacionales y consorcios de investigación y la innovación propia empujaron a las empresas hacia la frontera tecnológic

The Role of Fiscal Policy in Development of Non-Resource Sector

The research investigates the impact of the fiscal policy on the non-oil sector of Azerbaijani economy in the framework of cointegration and error correction modeling over the quarterly period 2000-2009. For increasing robustness of the obtained results, we employed two different cointegration methods: the residual-based Engle-Granger approach and the system-based Johansen approach. The empirical results from these approaches are quite close to each other and indicate that the government expenditures have significant positive influence on the non-oil GDP both in the long- and short-run. Therefore, the fiscal policy can play a supportive role in developing the non-oil sector. We further showed that ability of the fiscal policy to support the non-oil sector development, among others, is heavily determined by the degree of dependence on the oil revenues. Therefore, one of the urgent remedies for the Azerbaijani policy makers is to loosen gradually the dependence of the government budget on the oil revenues and oil prices. Instead, non-oil taxes can be considered as an alternative source of the government revenues. We also recommend that the policy makers should also pay particular attention to the investment issues as it has a positive effect on the non-oil sector development. Finally, we reemphasize the importance of future detailed research on improving the efficiency of the fiscal policy in the non-oil sector

The Role of Fiscal Policy in Development of Non-Resource Sector

The research investigates the impact of the fiscal policy on the non-oil sector of Azerbaijani economy in the framework of cointegration and error correction modeling over the quarterly period 2000-2009. For increasing robustness of the obtained results, we employed two different cointegration methods: the residual-based Engle-Granger approach and the system-based Johansen approach. The empirical results from these approaches are quite close to each other and indicate that the government expenditures have significant positive influence on the non-oil GDP both in the long- and short-run. Therefore, the fiscal policy can play a supportive role in developing the non-oil sector. We further showed that ability of the fiscal policy to support the non-oil sector development, among others, is heavily determined by the degree of dependence on the oil revenues. Therefore, one of the urgent remedies for the Azerbaijani policy makers is to loosen gradually the dependence of the government budget on the oil revenues and oil prices. Instead, non-oil taxes can be considered as an alternative source of the government revenues. We also recommend that the policy makers should also pay particular attention to the investment issues as it has a positive effect on the non-oil sector development. Finally, we reemphasize the importance of future detailed research on improving the efficiency of the fiscal policy in the non-oil sector

The Role of the Fiscal Policy in the Development of the Non-Resource

The research investigates the impact of the fiscal policy on the non-oil sector of Azerbaijani economy in the framework of cointegration and error correction modeling over the quarterly period 2000-2009. For increasing robustness of the obtained results, we employed two different cointegration methods: the residual-based Engle-Granger approach and the system-based Johansen approach. The empirical results from these approaches are quite close to each other and indicate that the government expenditures have significant positive influence on the non-oil GDP both in the long- and short-run. Therefore, the fiscal policy can play a supportive role in developing the non-oil sector. We further showed that ability of the fiscal policy to support the non-oil sector development, among others, is heavily determined by the degree of dependence on the oil revenues. Therefore, one of the urgent remedies for the Azerbaijani policy makers is to loosen gradually the dependence of the government budget on the oil revenues and oil prices. Instead, non-oil taxes can be considered as an alternative source of the government revenues. We also recommend that the policy makers should also pay particular attention to the investment issues as it has a positive effect on the non-oil sector development. Finally, we reemphasize the importance of future detailed research on improving the efficiency of the fiscal policy in the non-oil sector