Household Reaction to Changes in Housing Wealth

Abstract:     
It is widely claimed that housing wealth, as well as stock prices, have an impact on consumption and hence on aggregate economic activity. This paper presents a broad overview of the issues that arise in evaluating this claim in the context of recent research in behavioral economics. Particular attention is paid to a model of the response of consumption to wealth components produced by Christopher Carroll [2004].

Keywords: Wealth effect, home prices, stock prices, consumption, saving, life cycle theory, interest rates, inflation, bubble

JEL Classifications: E21

Working Paper Series