Title: Comparing Housing Wealth and Stock Wealth Effects on Consumption
Abstract: How strongly does consumption respond to changes in wealth? Is the response to housing wealth different than the response to stock market wealth? Policymakers are currently very interested in the magnitudes of such wealth effects, in light of the recent boom and crash in stock prices and the current strength in housing prices. We are trying to estimate the propensity to consume out of various types of wealth and are updating previous studies using time-series data at the national level. This journal article is available at ScholarlyCommons: http://repository.upenn.edu/wharton_research_scholars/24 Comparing Housing Wealth and Stock Wealth Effects on Consumption Allison Floam Dr. Nicholas Souleles May 4, 2005 Allison Floam 9/8/2005 PROBLEM STATEMENT How strongly does consumption respond to changes in wealth? Is the response to housing wealth different than the response to stock market wealth? Policymakers are currently very interested in the magnitudes of such wealth effects, in light of the recent boom and crash in stock prices and the current strength in housing prices. We are trying to estimate the propensity to consume out of various types of wealth and are updating previous studies using time-series data at the national level. BACKGROUND This topic is particularly interesting and relevant to policymakers. In the late 1990s we witnessed an economic expansion leading to a stock market bubble. Then in 2001, we saw the bubble burst and stock market crash but housing prices have remained strong to date. One view, apparently espoused by the Fed, is that the positive wealth effect from housing might have largely offset the negative wealth from stocks, helping to stabilize the economy. The housing market has also experienced dramatic changes in the past decades with second mortgages and home equity loans enhancing the ability of consumers to spend out of housing wealth. We are trying to estimate the magnitudes of the marginal propensity to consume (MPC) out of stock market wealth and the MPC out of housing wealth, and to test whether they differ. If the MPC out of housing wealth is greater than that out of stock wealth, this will help confirm the Fed’s view (and vice versa). We will measure these effects on total household consumption and break them down into durables, non-durables, and services as well as their respective subcategories. In addition to the MPCs, we also examine the percentage changes in different categories of consumption as a function of the percentage changes in housing versus stock market wealth.
Publication Year: 2005
Publication Date: 2005-01-01
Language: en
Type: article
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Cited By Count: 1
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