Advanced Search
MyIDEAS: Login to save this paper or follow this series

Wealth effects on consumption: evidence from the euro area

Contents:

Author Info

  • Sousa, Ricardo M.

Abstract

This paper estimates the wealth effects on consumption in the euro area as a whole. I show that: (i) financial wealth effects are relatively large and statistically significant; (ii) housing wealth effects are virtually nil and not significant; (iii) consumption growth exhibits strong persistence and responds sluggishly to shocks; and (iv) the immediate response of consumption to wealth is substantially different from the longrun wealth effects. By disaggregating financial wealth into its major components, the estimates suggest that wealth effects are particularly large for currency and deposits, and shares and mutual funds. In addition, consumption seems to be very responsive to financial liabilities and mortgage loans. JEL Classification: E21, E44, D12

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1050.pdf
Download Restriction: no

Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1050.

as in new window
Length:
Date of creation: May 2009
Date of revision:
Handle: RePEc:ecb:ecbwps:20091050

Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC

Order Information:
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Email:

Related research

Keywords: Consumption; financial wealth; housing wealth;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," NBER Working Papers 12746, National Bureau of Economic Research, Inc.
  2. Iacoviello, Matteo & Ortalo-Magne, Francois, 2003. "Hedging Housing Risk in London," The Journal of Real Estate Finance and Economics, Springer, vol. 27(2), pages 191-209, September.
  3. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  4. Peek, Joe, 1983. "Capital Gains and Personal Saving Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(1), pages 1-23, February.
  5. Coenen, Günter & Wieland, Volker, 2002. "A Small Estimated Euro Area Model with Rational Expectations and Nominal Rigidities," CEPR Discussion Papers 3574, C.E.P.R. Discussion Papers.
  6. Warwick J. McKibbin & Anthony J. Richards, 1988. "Consumption and Permanent Income: The Australian Case," RBA Research Discussion Papers rdp8808, Reserve Bank of Australia.
  7. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  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 2001-09, Board of Governors of the Federal Reserve System (U.S.).
  9. Alexander Ludwig & Torsten Sløk, 2002. "The Impact of Changes in Stock Prices and House Priceson Consumption in OECD Countries," IMF Working Papers 02/1, International Monetary Fund.
  10. Englund, Peter & Hwang, Min & Quigley, John M, 2002. "Hedging Housing Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 167-200, Jan.-Marc.
  11. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
  12. John Y. Campbell & Joao F. Cocco, 2005. "How Do House Prices Affect Consumption? Evidence From Micro Data," Harvard Institute of Economic Research Working Papers 2083, Harvard - Institute of Economic Research.
  13. Christina D. Romer, 1988. "The Great Crash and the Onset of the Great Depression," NBER Working Papers 2639, National Bureau of Economic Research, Inc.
  14. Karl E. Case & John M. Quigley & Robert J. Shiller, 2001. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Cowles Foundation Discussion Papers 1335, Cowles Foundation for Research in Economics, Yale University.
  15. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Wealth Effects in Emerging Market Economies," NIPE Working Papers 4/2009, NIPE - Universidade do Minho.
  16. repec:fth:harver:1435 is not listed on IDEAS
  17. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
  18. Monica Paiella, 2004. "Does wealth affect consumption? Evidence for Italy," Temi di discussione (Economic working papers) 510, Bank of Italy, Economic Research and International Relations Area.
  19. Elliott, J Walter, 1980. "Wealth and Wealth Proxies in a Permanent Income Model," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 509-35, November.
  20. Sundaresan, Suresh M, 1989. "Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 73-89.
  21. Yoshikawa, Hiroshi & Ohtaka, Fumio, 1989. "An analysis of female labor supply, housing demand and the saving rate in Japan," European Economic Review, Elsevier, vol. 33(5), pages 997-1023, May.
  22. Cho, Sungwon, 2006. "Evidence of a stock market wealth effect using household level data," Economics Letters, Elsevier, vol. 90(3), pages 402-406, March.
  23. Torsten Sløk & Hali J. Edison, 2001. "Wealth Effects and the New Economy," IMF Working Papers 01/77, International Monetary Fund.
  24. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
  25. Joao Cocco, 2000. "Hedging House Price Risk With Incomplete Markets," Computing in Economics and Finance 2000 317, Society for Computational Economics.
  26. Yash P. Mehra, 2001. "The wealth effect in empirical life-cycle aggregate consumption equations," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 45-67.
  27. Kennickell, Arthur B & Starr-McCluer, Martha, 1997. "Retrospective Reporting of Household Wealth: Evidence from the 1983-1989 Survey of Consumer Finances," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(4), pages 452-63, October.
  28. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  29. Hilary W. Hoynes & Daniel L. McFadden, 1996. "The Impact of Demographics on Housing and Nonhousing Wealth in the United States," NBER Chapters, in: The Economic Effects of Aging in the United States and Japan, pages 153-194 National Bureau of Economic Research, Inc.
  30. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
  31. Willman, Alpo & Estrada, Ángel, 2002. "The Spanish block of the ESCB-multi-country model," Working Paper Series 0149, European Central Bank.
  32. Ogawa, Kazuo & Kitasaka, Shin-ichi & Yamaoka, Hiroshi & Iwata, Yasuharu, 1996. "An empirical re-evaluation of wealth effect in Japanese household behavior," Japan and the World Economy, Elsevier, vol. 8(4), pages 423-442, December.
  33. Ricardo M. Sousa, 2007. "Wealth Shocks and Risk Aversion," NIPE Working Papers 28/2007, NIPE - Universidade do Minho.
  34. Horioka, Charles Yuji, 1996. "Capital Gains in Japan: Their Magnitude and Impact on Consumption," Economic Journal, Royal Economic Society, vol. 106(436), pages 560-77, May.
  35. 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.
  36. Patrick Bajari & C. Lanier Benkard & John Krainer, 2003. "House Prices and Consumer Welfare," NBER Working Papers 9783, National Bureau of Economic Research, Inc.
  37. Bhatia, Kul B, 1987. "Real Estate Assets and Consumer Spending," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 437-44, May.
  38. Alvin Tan & Graham Voss, 2000. "Consumption and Wealth," RBA Research Discussion Papers rdp2000-09, Reserve Bank of Australia.
  39. Slacalek, Jiri, 2009. "What Drives Personal Consumption? The Role of Housing and Financial Wealth," Working Paper Series 1117, European Central Bank.
  40. Lise Pichette, 2000. "Les effets réels du cours des actions sur la consommation," Working Papers 00-21, Bank of Canada.
  41. 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.
  42. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  43. Rossi, Nicola & Visco, Ignazio, 1995. "National saving and social security in Italy," Ricerche Economiche, Elsevier, vol. 49(4), pages 329-356, December.
  44. Grant, Charles & Peltonen, Tuomas A., 2008. "Housing and equity wealth effects of Italian households," Working Paper Series 0857, European Central Bank.
  45. Gary V. Engelhardt & Christopher J. Mayer, 1995. "Intergenerational transfers, borrowing constraints, and saving behavior: evidence from the housing market," Working Papers 95-11, Federal Reserve Bank of Boston.
  46. Filippo Altissimo & Evaggelia Georgiou & Teresa Sastre & Maria Teresa Valderrama & Gabriel Sterne & Marc Stocker & Mark Weth & Karl Whelan & Alpo Willman, 2005. "Wealth and asset price effects on economic activity," Occasional Paper Series 29, European Central Bank.
  47. Nikola Dvornak & Marion Kohler, 2003. "Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia," RBA Research Discussion Papers rdp2003-07, Reserve Bank of Australia.
  48. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-occupied housing as a hedge against rent risk," Working Papers 05-10, Federal Reserve Bank of Philadelphia.
  49. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  50. Levin, Laurence, 1998. "Are assets fungible?: Testing the behavioral theory of life-cycle savings," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 59-83, July.
  51. repec:sae:niesru:v:140:y::i:1:p:78-85 is not listed on IDEAS
  52. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers 208, OECD Publishing.
  53. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  54. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
  55. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
  56. Ricardo M. Sousa, 2003. "Property of stocks and wealth effects on consumption," NIPE Working Papers 2/2003, NIPE - Universidade do Minho.
  57. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
  58. Pissarides, Christopher A, 1978. "Liquidity Considerations in the Theory of Consumption," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 279-96, May.
  59. James M. Poterba & Andrew A. Samwick, 1995. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 295-372.
  60. Gabriela Lopes de Castro, 2007. "The Wealth Effect on Consumption in the Portuguese Economy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  61. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  62. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  63. Guido W. Imbens & Donald B. Rubin & Bruce I. Sacerdote, 2001. "Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players," American Economic Review, American Economic Association, vol. 91(4), pages 778-794, September.
  64. Funke, Norbert, 2004. "Is there a stock market wealth effect in emerging markets?," Economics Letters, Elsevier, vol. 83(3), pages 417-421, June.
  65. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  66. Eva Sierminska & Yelena Takhtamanova, 2007. "Wealth effects out of financial and housing wealth: cross country and age group comparisons," Working Paper Series 2007-01, Federal Reserve Bank of San Francisco.
  67. Alvin Tan & Graham Voss, 2003. "Consumption and Wealth in Australia," The Economic Record, The Economic Society of Australia, vol. 79(244), pages 39-56, 03.
  68. Luigi Guiso & Monica Paiella & Ignazio Visco, 2005. "Do capital gains affect consumption? Estimates of wealth effects from Italian householdsÂ’ behavior," Temi di discussione (Economic working papers) 555, Bank of Italy, Economic Research and International Relations Area.
  69. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
  70. Davidson, James E. H. & Hendry, David F., 1981. "Interpreting econometric evidence : The behaviour of consumers' expenditure in the UK," European Economic Review, Elsevier, vol. 16(1), pages 177-192.
  71. Ohtake, F. & Horioka, C.Y., 1995. "Saving Motives in Japan," ISER Discussion Paper 0392, Institute of Social and Economic Research, Osaka University.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. It's not a debt crisis
    by chris dillow in Stumbling and Mumbling on 2011-11-03 11:22:28
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ansgar Belke & Jennifer Schneider, 2013. "Portfolio Choice of Financial Investors and European Business Cycle Convergence – A Panel Analysis for EU Countries," ROME Working Papers 201312, ROME Network.
  2. 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.
  3. Magdalena Zachłod-Jelec, 2010. "Interrelations between consumption and wealth in Poland," Working Papers 2, Ministry of Finance in Poland.
  4. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2012. "Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201224, University of Pretoria, Department of Economics.
  5. Jakob B Madsen & Hui Yao, 2012. "Wealth Effects In Consumption: The Financial Accelerator And Banks’ Willingness To Lend," Development Research Unit Working Paper Series 56-12, Monash University, Department of Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20091050. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.