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CONSUMPTION, WEALTH, STOCK AND GOVERNMENT BOND RETURNS: INTERNATIONAL EVIDENCE

Authors

  • ANTÓNIO AFONSO,

    1. Technical University of Lisbon, UECE, European Central Bank
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  • RICARDO M. SOUSA

    1. University of Minho, NIPE, London School of Economics, FMG
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    • We are grateful to Jerry Coakley, Ad van Riet, to participants to an ECB workshop, to the Money, Macro and Finance Research Group 41st Annual Conference, the 2010 Annual Meeting of the European Public Choice Society, and to two anonymous referees for helpful comments. Ricardo Sousa would like to thank the Fiscal Policies Division of the ECB for its hospitality. UECE and NIPE are supported by FCT (Fundação para a Ciência e a Tecnologia, Portugal). The opinions expressed herein are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem.


  •  Manuscript received 5.5.10; final version received 14.9.10.

Abstract

In this paper, we show, from the consumer's budget constraint, that the residuals of the trend relationship among consumption, aggregate wealth and labour income should predict both stock returns and government bond yields. We use data for several OECD countries and find that when agents expect future stock returns to be higher, they will temporarily allow consumption to rise. Regarding government bond yields, when bonds are seen as a component of asset wealth, then investors react in the same way. If, however, the increase in the yields is perceived as signalling a future rise in taxes, then they will temporarily reduce their consumption.

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