The Hyper-Inflation of Land and Consumption Behavior

Using the Korean date (1975-1991), this study shows that the hyper-appreciation of land prices can have a significant effect on private consumption. The Test for a structural shift in the consumption function indicates that remarkable changes in consumption behavior are due to windfall gains from land ownership. The overall finding is consistent with a modified life cycle-permanent income hypothesis in an imperfect financial environment. When capital markets are imperfect and the land price inflation is rampant, optimal consumption depends less on the traditional lifecycle variable, and more on current income and a windfall gain. [E21, E31]