Resurrecting the Wealth Effect on Consumption: Further Analysis and Extension
30 Pages Posted: 1 Jun 2007
Date Written: October 2006
This paper investigates whether various components of wealth affects real consumption asymmetrically through a threshold adjustment model. The empirical findings for the U.S. show that stock market assets, financial assets (with stock market included), and household net assets exert a practical wealth effect on consumption expenditure. By contrast, financial assets, excluding stock market assets, tangible assets, total assets, and Lettau-Ludvigson measure of net assets do not exert a wealth effect on consumption expenditure. Moreover, the empirical findings favor the presence of an asymmetric effect on real consumption for the former cases, with negative 'news' affecting consumption less than positive 'news'.
Keywords: Consumption, Stock market, Wealth effect, Asymmetry
JEL Classification: E21, E44
Suggested Citation: Suggested Citation