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The effects of stock market movements on consumption and investment: does the shock matter?

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  • Stephen Millard
  • John Power

Abstract

This paper uses a simple model to examine the links between equity price movements and consumption and investment. Generally, the effect of a given movement in equity prices on consumption depends on the underlying source of the shock to equity prices, and some empirical evidence is presented that supports this. Furthermore, in the model the effect of a given movement in equity prices on investment does not depend on the source of the shock. However, some theoretical arguments and empirical evidence are provided to suggest that it might in the real world.

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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP236.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 236.

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Date of creation: Oct 2004
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Handle: RePEc:boe:boeewp:236

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  1. Lettau, Martin & Ludvigson, Sydney, 2001. "Time-Varying Risk Premia and the Cost of Capital: An Alternative Implication of the Q Theory of Investment," CEPR Discussion Papers 3103, C.E.P.R. Discussion Papers.
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  7. Laurence Boone & Nathalie Girouard & Isabelle Wanner, 2001. "Financial Market Liberalisation, Wealth and Consumption," OECD Economics Department Working Papers 308, OECD Publishing.
  8. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-09, Board of Governors of the Federal Reserve System (U.S.).
  9. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  10. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  11. Ellis, Colin & Simon Price, 2003. "UK Business Investment: Long-Run Elasticities and Short-Run Dynamics," Royal Economic Society Annual Conference 2003, Royal Economic Society 73, Royal Economic Society.
  12. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
  13. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
  14. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
  15. Carl D. Lantz & Pierre-Daniel G. Sarte, 2001. "Consumption, savings, and the meaning of the wealth effect in general equilibrium," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 53-71.
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Cited by:
  1. Goodness C. Aye & Rangan Gupta & Alain Kaninda & Wendy Nyakabawo & Aarifah Razak, 2013. "House Price, Stock Price and Consumption in South Africa: A Structural VAR Approach," Working Papers 201309, University of Pretoria, Department of Economics.
  2. Roy Cromb & Emilio Fernandez-Corugedo, 2004. "Long-term interest rates, wealth and consumption," Bank of England working papers 243, Bank of England.

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