Financialisation and the Portuguese private consumption: two contradictory effects?

Abstract

This paper makes an empirical evaluation of the relationship between financialisation and the Portuguese private consumption by performing a time series econometric analysis from the first quarter of 1996 to the third quarter of 2019. Framed within the post-Keynesian literature, financialisation has two contradictory effects on private consumption. The first one corresponds to the fall in the households’ labour income, which favours a deceleration of private consumption. The second one corresponds to the increase of households’ debt and the increase of households’ financial and housing wealth, which favours an acceleration of private consumption. The global net effect of financialisation tends to be positive because the beneficial wealth effect suppresses the harmful income effect. We estimated a private consumption equation that includes four control variables (unemployment rate, inflation rate, short-term interest rate and long-term interest rate) and three variables linked to financialisation (labour income, net financial wealth and housing wealth). Our results confirm that labour income, net financial wealth and housing wealth are positive determinants of Portuguese private consumption. Our results also show that financialisation has represented an important driver of Portuguese private consumption, particularly due to the beneficial effects of net financial wealth.

The finance–inequality nexus in the era of financialisation: Evidence for Portugal

“…This happens because low-skilled workers would have lower wages than highskilled workers who have already been working in sectors with high productivity immediately after the transference (i.e., in the short term) from the two sectors, which will widen inequality. Barro (2000) adds that the rise in inequality in the short term could instigate socio-political unrest 2 The demand from poorer people for financial services (especially for credit) is higher due to their aspiration to emulate the lifestyle and consumption patterns of richer people (Gonçalves and Barradas, 2021;Barradas, 2022a). This is the so-called 'demonstration effect' or 'Duesenberry effect' (Duesenberry, 1949), according to which poorer people exhibit 'expenditure cascades' behaviour or 'keeping up with the Joneses' behaviour in terms of durable goods in the wake of conspicuous consumption (Gonçalves and Barradas, 2021).…”

“…Barro (2000) adds that the rise in inequality in the short term could instigate socio-political unrest 2 The demand from poorer people for financial services (especially for credit) is higher due to their aspiration to emulate the lifestyle and consumption patterns of richer people (Gonçalves and Barradas, 2021;Barradas, 2022a). This is the so-called 'demonstration effect' or 'Duesenberry effect' (Duesenberry, 1949), according to which poorer people exhibit 'expenditure cascades' behaviour or 'keeping up with the Joneses' behaviour in terms of durable goods in the wake of conspicuous consumption (Gonçalves and Barradas, 2021). The availability of new goods and services (e.g., smartphones and other information and communication technological devices) too attractive and tempting to be resisted even by the poorand the corresponding influence of advertising, marketing and mass media have fed this type of behaviour (Cynamon and Fazzari, 2008;Barba and Pivetti, 2009).…”

“…1 1 The demand from poorer people for financial services (especially for credit) is higher due to their aspiration to emulate the lifestyle and consumption patterns of richer people (Barradas, 2022a; Gonçalves & Barradas, 2021). This is the so‐called ‘demonstration effect’ or ‘Duesenberry effect’ (Duesenberry, 1949), according to which poorer people exhibit ‘expenditure cascades’ behaviour or ‘keeping up with the Joneses’ behaviour in terms of durable goods in the wake of conspicuous consumption (Gonçalves & Barradas, 2021).…”

Why does the nexus between finance and inequality break in times of financialization? Empirical evidence for the European Union countries

“…2 As posited by Galor and Zeira (1993), Beck et al (2007), Claessens and Perotti (2007), Kim and Lin (2011) and Tan and Law (2012), the poorer face more financial constraints as a result of their lower likelihood of repaying loans, and are the most affected by financial market imperfections, information asymmetries, moral hazard problems, contract enforcement costs, transaction costs, screening costs and monitoring costs because of their lack of collateral, credit histories and connections. Nonetheless, poorer people have higher levels of demand for financial services, especially for credit, because of their 'expenditure cascade' or 'keeping up with the Joneses' behaviour, in terms of consumption of durable goods and/or conspicuous consumption (Gonçalves and Barradas, 2021;Barradas, 2022a). As emphasized by these authors, this occurs because poorer people tend to imitate the lifestyle and consumption standards of richer people because of the strong influence of advertising, marketing and mass media on the attractiveness and temptingness of the new goods and services that are constantly released, such as smartphones and other technological devices (Cynamon and Fazzari, 2008;Barba and Pivetti, 2009).…”