Wealth Effects and the Consumption of Leisure: Retirement Decisions During the Stock Market Boom of the 1990s

40 Pages Posted: 18 Aug 2003

See all articles by Julia Lynn Coronado

Julia Lynn Coronado

Federal Reserve Board - Division of Research and Statistics

Maria G. Perozek

Federal Reserve Board - Research & Statistics

Date Written: May 2003

Abstract

It is well accepted that households increase consumption of goods and services in response to an unexpected increase in wealth. Consensus estimates of this wealth effect are in the range of 3 to 5 cents of additional consumption spending in the long run for each additional dollar of wealth. Economic theory also suggests that consumption of leisure, like consumption of goods and services, should increase with positive shocks to wealth. In this paper, we ask whether the run-up in equity prices during the 1990s led older workers to retire earlier than they had previously planned. We identify the effect by exploiting unique data on retirement expectations from the Health and Retirement Survey. Our econometric results suggest that respondents who held corporate equity immediately prior to the bull market of the 1990s retired, on average, 7 months earlier than other respondents.

Keywords: Wealth effect, retirement

JEL Classification: D91, J26

Suggested Citation

Coronado, Julia Lynn and Perozek, Maria G., Wealth Effects and the Consumption of Leisure: Retirement Decisions During the Stock Market Boom of the 1990s (May 2003). FEDS Working Paper No. 2003-20. Available at SSRN: https://ssrn.com/abstract=419721 or http://dx.doi.org/10.2139/ssrn.419721

Julia Lynn Coronado (Contact Author)

Federal Reserve Board - Division of Research and Statistics ( email )

Washington, DC 20551
United States
202-452-3044 (Phone)
202-872-4927 (Fax)

Maria G. Perozek

Federal Reserve Board - Research & Statistics ( email )

Washington, DC 20551
United States
202-452-2692 (Phone)
202-728-5889 (Fax)

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