This thesis investigates the financial and housing wealth effects on aggregate private consumption in Turkey for the period 1987 to 2007. Given the lack of data on housing stock and prices, the study proposes to construct a proxy for the housing wealth series, using a combination of related existing data, including the housing investment deflator, the rental price index, the population size, the occupancy permits given to newly built dwellings and the household size.
A long-run equilibrium relationship between aggregate private consumption, disposable income, financial and housing wealth is estimated using the Johansen (1988, 1991) cointegration method. A sensitivity analysis is undertaken to examine the robustness of the long-run coefficient estimates, following Leamer & Leonard's (1983) extreme bound analysis approach. An error correction model is also estimated to track the short-run dynamics of the consumption function.
The results of the empirical analysis show that disposable Income is the major determinant of aggregate private consumption in Turkey. While the financial wealth effect on consumption is estimated to be positive and statistically significant, the impact of housing wealth effect on consumption is found be positive but statistically insignificant. The sensitivity analysis indicates that income and financial wealth elasticities remain robust with respect to changes in the definition of the housing wealth series.