How Large Are Housing And Financial Wealth Effects? A New Approach

This paper presents a simple new method for measuring 'Wealth effects' on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption 'Habits') to distinguish between immediate and eventual wealth effects. In U.S. data, the authors estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. They argue that the method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.

Provided by: European Central Bank Topic: CXO Date Added: Dec 2010 Format: PDF

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