How Large are Housing and Financial Wealth Effects? A New Approach
34 Pages Posted: 6 Jan 2011
Date Written: December 17, 2010
This paper presents a simple new method for measuring 'wealth effects' on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption 'habits') to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.
Keywords: Housing Wealth, Wealth Effect, Consumption Dynamics, Asset Prices
JEL Classification: E21, E32, C22
Suggested Citation: Suggested Citation