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How large are housing and financial wealth effects? A new approach

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  • Carroll, Christopher D.
  • Otsuka, Misuzu
  • Slacalek, Jiri

Abstract

This paper presents a simple new method for measuring `wealth effects' on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption `habits') to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector. JEL Classification: E21, E32, C22

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1283.

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Date of creation: Dec 2010
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Handle: RePEc:ecb:ecbwps:20101283

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Keywords: asset prices; Consumption Dynamics; housing wealth; wealth effect;

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