A Primer on the Economics and Time Series Econometrics of Wealth Effects

Posted: 23 Feb 2001

See all articles by Morris A. Davis

Morris A. Davis

Rutgers Business School

Michael Palumbo

Board of Governors of the Federal Reserve System

Date Written: May 2001

Abstract

This paper reviews the statistical approach typically applied by macroeconomists to investigate the empirical link between aggregate data on household consumption, income, and wealth. In particular, we focus on studies determining whether and how much changes in net worth, such as those generated by the stock-market boom in the U.S. over the latter 1990s, are responsible for subsequent swings in the growth rate of consumer spending. We show how simple economic theory is used to motivate an econometric strategy that consists of two stages of analysis. First, regressions are used to identify trend movements shared by consumption, income, and wealth over the long run, then deviations of these series from their common long-run trends are used to help forecast consumption growth over the short run. Our discussion highlights the various judgements that researchers must make in the course of implementing this empirical approach, and we detail how specific parameter estimates describing the magnitude of the wealth effect on consumption--and even broad conclusions about its existence-are affected by making alternative choices.

Keywords: Consumption Function, Life Cycle Model

JEL Classification: E2, D9

Suggested Citation

Davis, Morris A. and Palumbo, Michael G., A Primer on the Economics and Time Series Econometrics of Wealth Effects (May 2001). FEDS Working Paper 2001-09, Available at SSRN: https://ssrn.com/abstract=261323 or http://dx.doi.org/10.2139/ssrn.261323

Morris A. Davis

Rutgers Business School ( email )

Rutgers Business School
One Washington Park #1092
Newark, NJ 07102
United States

Michael G. Palumbo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2296 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,853
PlumX Metrics