The Stock Market, Housing and Consumer Spending: A Survey of the Evidence on Wealth Effects
23 Pages Posted: 28 Jul 2008
Date Written: June 16, 2008
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.
Keywords: stock market wealth, housing, consumption, direct wealth effect, common causality, borrowing constraints
JEL Classification: E2, G1
Suggested Citation: Suggested Citation