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A primer on the economics and time series econometrics of wealth effects

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Author Info
Morris A. Davis
Michael G. Palumbo

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Abstract

This paper reviews the statistical approach typically applied by macroeconomists to investigate the empirical links among aggregate data on household consumption, income, and wealth. In particular, we focus on studies determining whether and how much changes in net worth, such as those generated by the stock-market boom in the U.S. over the latter 1990s, are responsible for subsequent swings in the growth rate of consumer spending. We show how simple economic theory is used to motivate an econometric strategy that consists of two stages of analysis. First, regressions are used to identify trend movements shared by consumption, income, and wealth over the long run, then deviations of these series from their commong long- run trends are used to help forecast consumption growth over the short run. Our discussion highlights the various judgments that researchers must make in the course of implementing this empirical approach, and we detail how specific parameter estimates describing the magnitude of the wealth effect on consumption--and even broad conclusions about its existence--are affected by making alternative choices.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-09.

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Date of creation: 2001
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Handle: RePEc:fip:fedgfe:2001-09

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Keywords: Consumption (Economics) ; Wealth;

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  3. Lattimore, Ralph, 1994. "Australian Consumption and Saving," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 54-70, Summer.
  4. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 357-73, July. [Downloadable!] (restricted)
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  8. Berg, Lennart & Bergstrom, Reinhold, 1995. " Housing and Financial Wealth, Financial Deregulation and Consumption--The Swedish Case," Scandinavian Journal of Economics, Blackwell Publishing, vol. 97(3), pages 421-39, September.
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  12. Muellbauer, John, 1994. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 1-41, Summer.
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  14. P.A. Tinsley, 1993. "Fitting both data and theories: polynomial adjustment costs and error- correction decision rules," Finance and Economics Discussion Series 93-21, Board of Governors of the Federal Reserve System (U.S.).
  15. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 29-51. [Downloadable!]
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  16. Julia Campos & Neil R. Ericsson, 2000. "Constructive data mining: modeling consumers' expenditure in Venezuela," International Finance Discussion Papers 663, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  17. Jacobs, Jan & Sterken, Elmer, 1995. "The IBS-CCSO quarterly model of the Netherlands Specification, simulation and analysis," Economic Modelling, Elsevier, vol. 12(2), pages 111-163, April. [Downloadable!] (restricted)
  18. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December. [Downloadable!] (restricted)
  20. Christensen, Anders Moller & Knudsen, Dan, 1992. "MONA: A quarterly model of the Danish economy," Economic Modelling, Elsevier, vol. 9(1), pages 10-74, January. [Downloadable!] (restricted)
  21. 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. [Downloadable!] (restricted)
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