Property of Stocks and Wealth Effects on Consumption

University of Minho, NIPE Working Paper No. 2/2003

49 Pages Posted: 6 Aug 2003

See all articles by Ricardo M. Sousa

Ricardo M. Sousa

University of Minho; Economic Policies Research Unit (NIPE); London School of Economics & Political Science (LSE) - Financial Markets Group; London School of Economics

Date Written: March 2003

Abstract

Recent fluctuations of financial markets, especially, stock markets fluctuations, have revived the interest concerning the dynamics of real economic activity, namely, of private consumption. In this work, the role of stock market as a determinant of private consumption is analyzed, namely, by the consideration of wealth effects. It is also analyzed the potential differences of these effects originated by different categories of property of stocks (direct versus indirect property).

Using a sample for the U. S. economy, in the period 1952:Q1 - 2001:Q4, several long-run relationships were estimated, suggesting that wealth effects associated to direct property are about 3.5 times superior to those associated to indirect property. Short-run dynamics is analyzed with the estimation of a single equation, suggesting that consumption contemporaneously answers to changes in income and in wealth and that the adjustment to long-run component is very slow, which constitutes an indicator that consumers gradually change their behaviors, possibly, due to habit formation. There is also evidence supporting the presence of the indirect channel of wealth effect.

Keywords: stock market, wealth, consumption, cointegration

JEL Classification: E21, E44, D12

Suggested Citation

Sousa, Ricardo Magalhaes, Property of Stocks and Wealth Effects on Consumption (March 2003). University of Minho, NIPE Working Paper No. 2/2003, Available at SSRN: https://ssrn.com/abstract=412286 or http://dx.doi.org/10.2139/ssrn.412286

Ricardo Magalhaes Sousa (Contact Author)

University of Minho ( email )

Campus Gualtar
Braga, 4710-057
Portugal
+351253604584 (Phone)
+351253676375 (Fax)

HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa

Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal
+351253604584 (Phone)
+351253676375 (Fax)

HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://econ.lse.ac.uk