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What Drives Personal Consumption?: The Role of Housing and Financial Wealth

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  • Jiri Slacalek

Abstract

I construct a new dataset with financial and housing wealth in 16 countries and investigate the effect of wealth on consumption. The baseline estimation method based on the sluggishness of consumption growth implies that the long-run marginal propensity to consume out of total wealth averaged across countries is 5 cents. I find substantial heterogeneity in the wealth effects: the individual country estimates typically lie between 0 and 10 cents. The wealth effects are more powerful in market-based, Anglo-Saxon and non euro area economies. The effect of housing wealth is somewhat smaller than that of financial wealth for most countries, but not the US and the UK. The housing wealth effect has risen substantially after 1988 as it has become easier to borrow against housing wealth.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44944.de/dp647.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 647.

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Length: 33 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp647

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Keywords: Housing prices; wealth effect; consumption dynamics; portfolio choice;

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  1. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
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