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International Wealth Effects

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  • Jiri Slacalek

Abstract

This paper presents a detailed investigation of the wealth effect for 16 industrial countries using the recently proposed technique that exploits the sluggishness of consumption growth. I argue that, compared to the widespread cointegration-based methodology, the approach I apply has better theoretical foundations and is more immune to parameter instability. Empirically, this new technique implies smaller magnitude of the wealth effect in the G-8 countries and larger size of the income effect. I also document that the wealth effect tends to be larger in countries with more developed financial markets and has decreased substantially in the last twenty years.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44429.de/dp596.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 596.

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Length: 21 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp596

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Keywords: Wealth effect; income effect; consumption dynamics; sticky information;

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References

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  1. Christopher D. Carroll & Jiri Slacalek & Martin Sommer, 2008. "International Evidence On Sticky Consumption Growth," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 542, The Johns Hopkins University,Department of Economics.
  2. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  3. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2005. "Consumption, Wealth and Business Cycles in Germany," CESifo Working Paper Series 1443, CESifo Group Munich.
  4. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 56(3), pages 815-849, 06.
  5. Pietro Catte & Nathalie Girouard & Robert W.R. Price & Christophe André, 2004. "Housing Markets, Wealth and the Business Cycle," OECD Economics Department Working Papers 394, OECD Publishing.
  6. Ricardo Reis, 2004. "Inattentive Consumers," Working Papers, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics. 135, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  7. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 477, The Johns Hopkins University,Department of Economics.
  8. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, Econometric Society, vol. 71(4), pages 1027-1048, 07.
  9. Christopher D. Carroll & Johns Hopkins University, 2006. "Sticky Expectations and Consumption Dynamics," Computing in Economics and Finance 2006, Society for Computational Economics 21, Society for Computational Economics.
  10. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(4), pages 518-29, October.
  11. Muellbauer, John, 1986. "Habits, Rationality and Myopia in the Life-Cycle Consumption Function," CEPR Discussion Papers, C.E.P.R. Discussion Papers 112, C.E.P.R. Discussion Papers.
  12. Rudd, Jeremy & Whelan, Karl, 2002. "A Note on the Cointegration of Consumption, Income, and Wealth," Research Technical Papers 5/RT/02, Central Bank of Ireland.
  13. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  14. repec:fth:harver:1435 is not listed on IDEAS
  15. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  16. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers, Bank of England 204, Bank of England.
  17. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, Bank of Canada, vol. 2004(Spring), pages 29-35.
  18. Martin Sommer & Christopher Carroll & Jiri Slacalek, 2005. "The Epidemiology of Consumption," 2005 Meeting Papers, Society for Economic Dynamics 677, Society for Economic Dynamics.
  19. Alvin Tan & Graham Voss, 2003. "Consumption and Wealth in Australia," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 79(244), pages 39-56, 03.
  20. 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.
  21. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, American Economic Association, vol. 84(5), pages 1397-1408, December.
  22. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 391-406, June.
  23. Martin Sommer, 2004. "Habits, Sentiment and Predictable Income in the Dynamics of Aggregate Consumption," Macroeconomics, EconWPA 0408004, EconWPA.
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Citations

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Cited by:
  1. Catriona Purfield, 2007. "India," IMF Working Papers 07/221, International Monetary Fund.
  2. Tao Sun & L. Effie Psalida, 2009. "Spillovers to Emerging Equity Markets," IMF Working Papers 09/111, International Monetary Fund.
  3. Ingrid Groessl & Ulrich Fritsche, 2006. "The Store-of-Value-Function of Money as a Component of Household Risk Management," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 200606, Hamburg University, Department Wirtschaft und Politik.
  4. Arrondel, L. & Savignac, F. & Tracol, K., 2011. "Wealth Effects on Consumption Plans: French Households in the Crisis," Working papers, Banque de France 344, Banque de France.

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