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How Large Are Housing and Financial Wealth Effects? A New Approach
Author(s) -
CARROLL CHRISTOPHER D.,
OTSUKA MISUZU,
SLACALEK JIRI
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00365.x
Subject(s) - marginal propensity to consume , consumption (sociology) , cointegration , economics , econometrics , exploit , aggregate (composite) , wealth effect , margin (machine learning) , monetary economics , national wealth , finance , computer science , monetary policy , social science , materials science , computer security , machine learning , sociology , market liquidity , composite material
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, 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 eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration‐based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.