How Large are Housing and Financial Wealth Effects? A New Approach

34 Pages Posted: 6 Jan 2011

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Jiri Slacalek

European Central Bank (ECB)

Misuzu Otsuka

affiliation not provided to SSRN

Date Written: December 17, 2010

Abstract

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

Carroll, Christopher D. and Slacalek, Jiri and Otsuka, Misuzu, How Large are Housing and Financial Wealth Effects? A New Approach (December 17, 2010). ECB Working Paper No. 1283, Available at SSRN: https://ssrn.com/abstract=1727389

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Jiri Slacalek

European Central Bank (ECB) ( email )

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Germany

Misuzu Otsuka

affiliation not provided to SSRN ( email )

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