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The Stock Market, Housing and Consumer Spending: A Survey of the Evidence on Wealth Effects


Monica Paiella


University of Naples Federico II

June 16, 2008

Bank of Italy Research Paper No. A8

Abstract:     
This paper examines the literature on the relationship between stock and house prices and consumer spending. It reviews both the time-series studies and the microeconomic evidence. The time-series approach allows us to distinguish between short-run and long-run links between consumption, income and wealth. It allows us to identify which variables adjust to restore the long-run equilibrium in the case of a shock, and to determine the time taken by the adjustment process. The microeconomic literature improves our understanding of the link between wealth and expenditure and distinguishes among the alternative hypotheses - of direct wealth effect, common causality, and collateral channel - that have been proposed to explain this relationship. Based on the evidence, the relationship between wealth and consumer spending appears to be strong, although there is some disagreement as to the size and nature of the link. Furthermore, there also appear to be some important differences across countries, which should be allowed for by policymakers when appraising the policy implications of a change in asset prices.

Number of Pages in PDF File: 23

Keywords: stock market wealth, housing, consumption, direct wealth effect, common causality, borrowing constraints

JEL Classification: E2, G1

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Date posted: July 28, 2008  

Suggested Citation

Paiella, Monica, The Stock Market, Housing and Consumer Spending: A Survey of the Evidence on Wealth Effects (June 16, 2008). Bank of Italy Research Paper No. A8. Available at SSRN: http://ssrn.com/abstract=1162222 or http://dx.doi.org/10.2139/ssrn.1162222

Contact Information

Monica Paiella (Contact Author)
University of Naples Federico II ( email )
Via Amm. F. Acton, 38
80133 Naples, Caserta 80133
Italy
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