Disentangling the Wealth Effect: A Cohort Analysis of Household Saving in the 1990s

39 Pages Posted: 4 May 2001

See all articles by Dean M. Maki

Dean M. Maki

Putnam Investments - Macroeconomic Research

Michael Palumbo

Board of Governors of the Federal Reserve System

Date Written: April 2001

Abstract

In the U.S., household net worth rose substantially in the latter half of the 1990s and the personal saving rate dropped sharply. Researchers do not agree about just what behavior links these two events, or how to interpret the negative correlation between wealth and the saving rate over a longer time span. In this paper, we combine household-level data from the triennial Survey of Consumer Finances with quarterly, aggregate data from the Flow of Funds Accounts to estimate net worth and saving for different cohorts of households in the 1990s. We find that the groups of households whose balance sheets were boosted the most by surging equity prices were also the groups that substantially decreased their saving rates. Further, econometric analysis of these data produces propensities to consume out of wealth in the range of typical estimates obtained from aggregate data. Taken together, our results corroborate a direct view of the wealth effect on consumption.

Keywords: Consumption Function, Wealth Effect, Household Saving Behavior

JEL Classification: E2, D9

Suggested Citation

Maki, Dean and Palumbo, Michael G., Disentangling the Wealth Effect: A Cohort Analysis of Household Saving in the 1990s (April 2001). Available at SSRN: https://ssrn.com/abstract=268957 or http://dx.doi.org/10.2139/ssrn.268957

Dean Maki

Putnam Investments - Macroeconomic Research ( email )

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)

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