Revisiting Wealth Effects in France: A Double-Nonlinearity Approach

This paper investigates the relationship between French wealth and household consumption in a nonlinear context. At first, we update the previous French wealth effects estimates by taking into account the post subprime crisis period; we show that the wealth effect is still positive but only about 8%, rather than 13% suggesting that the wealth effect slightly decreased after the subprime crisis. In addition, unlike previous studies, we enable the wealth–consumption relationship to exhibit asymmetry, time variation and nonlinearity. To this end, we specify, on the one hand, two different threshold autoregressive models (TAR and MTAR) in order to reproduce nonlinear wealth effects in the short-term. On the other hand, we propose a time-varying cointegration specification to the consumption–wealth relationship in the long term. Interestingly, our specification enables the introduction of nonlinearity not only asymmetrical adjustment in the short run but also in the long-term relationship in order to capture different and complex forms of wealth effects. We show a significant wealth effect and find evidence of an unstable wealth–consumption relationship, particularly in 2000 and during the subprime crisis, suggesting an increase in the wealth effect during these periods.