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Decomposing Consumer Wealth Effects: Evidence on the Role of Real Estate Assets Following the Wealth Cycle of 1990-2002

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Author Info
Michael Donihue (Colby College)
Andriy Avramenko (Colby College)
Abstract

During the period from 1990 to 2002, U.S. households experienced a dramatic wealth cycle, induced by a 369 percent appreciation in the value of real per capita liquid stock-market assets, followed by a 55 percent decline. However, despite predictions at the time by some analysts relying on life-cycle models of consumption, consumer spending in real terms continued to rise throughout this period. Using data that include the period from 1990 to 2005, traditional approaches to estimating macroeconomic wealth effects on consumption confront two puzzles: (i) econometric evidence of a stable cointegrating relationship among consumption, income, and wealth is weak at best; and (ii) life-cycle models that rely on aggregate measures of wealth cannot explain why consumption did not collapse when the value of stock-market assets declined so dramatically. We address both puzzles by decomposing wealth according to the liquidity of household assets. In particular, we find that significant appreciation in the value of real estate assets that occurred after the peak of the wealth cycle helped to sustain consumer spending from 2000 to 2005.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 ()
Pages: 1472-1472
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Related research
Keywords: wealth effects life cycle consumption real estate wealth

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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