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Structural Break or Asymmetry? An Empirical Study of the Stock Wealth Effect on Consumption

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Author Info
Charles Ka Yui Leung
Nan-Kuang Chen
Chih-Chiang Hsu

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Abstract

The purpose of this paper is to examine whether the stock wealth effect of consumption exhibits structural change(s) or behaves asymmetrically over business cycles. We first perform a general test of linearity for the behavior of aggregate consumption in response to changes in stock wealth based on Hamilton's (2001) approach. When a nonlinear relation is discovered, we move on to investigate the source(s) of this nonlinearity. We consider two types of nonlinearity: structural break and asymmetry. It is of interest to policy makers whether the sensitivity of consumption to changes in households' financial wealth shows a significant shift over time due to institutional and policy changes, and whether consumption is likely to decline more due to stock wealth shrinkage when the economy is in a downturn, as has been found in investme

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 690.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:690

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Related research
Keywords: consumption; stock wealth; asymmetric effect; structural change;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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