How Large is the Housing Wealth Effect? a New Approach

21 Pages Posted: 13 Dec 2006  

Christopher D. Carroll

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

Misuzu Otsuka

Johns Hopkins University - Department of Economics

Jiri Slacalek

European Central Bank (ECB)

Date Written: December 2006

Abstract

This paper presents a simple new method for estimating the size of 'wealth effects' on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as 'habits' in the asset pricing literature) to distinguish between short-run and long-run 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 long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegration- based estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector.

Suggested Citation

Carroll, Christopher D. and Otsuka, Misuzu and Slacalek, Jiri, How Large is the Housing Wealth Effect? a New Approach (December 2006). NBER Working Paper No. w12746. Available at SSRN: https://ssrn.com/abstract=949756

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7602 (Phone)
303-845-7533 (Fax)

Consumer Financial Protection Bureau ( email )

United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Misuzu Otsuka

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Jiri Slacalek

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paper statistics

Downloads
123
Rank
189,276
Abstract Views
1,623