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How important is the stock market effect on consumption?

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Sydney Ludvigson
Charles Steindel

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Abstract

The 1990s have seen astonishing growth in the stock market portfolios of Americans, which many have argued has been a major force behind the growth of consumer spending. This paper reviews the relationship between the stock market and the consumer. Using a variety of econometric techniques and specifications, we fail to find evidence of a stable relationship between aggregate consumer spending and changes in aggregate household wealth. While stock market gains have surely provided some support for consumer spending, our hard knowledge is too limited to feel comfortable relying on estimates of the stock market effect in macroeconomic forecasts.

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9821.

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Date of creation: 1998
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Handle: RePEc:fip:fednrp:9821

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Keywords: Investments ; Consumption (Economics) ; Wealth;

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Gali, Jordi, 1990. "Finite horizons, life-cycle savings, and time-series evidence on consumption," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 433-452, December. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Charles Steindel, . "The determinants of private saving," Monograph, Board of Governors of the Federal Reserve System (U.S.), number 1981tdop.
  5. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc. [Downloadable!]
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  6. 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. [Downloadable!]
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  7. Poterba, J.M. & Samwick, A.A., 1996. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Working papers 96-2, Massachusetts Institute of Technology (MIT), Department of Economics.
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  8. N. Gregory Mankiw & Stephen P. Zeldes, 1991. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
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  10. Charles Steindel, 1992. "Changes in the U.S. cycle: shifts in capital spending and balance sheet changes," Research Paper 9224, Federal Reserve Bank of New York.
  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
  12. repec:fth:harver:1435 is not listed on IDEAS
  13. Martha Starr-McCluer, 1998. "Stock market wealth and consumer spending," Finance and Economics Discussion Series 1998-20, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  14. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  15. Modigliani, Franco & Tarantelli, E, 1975. "The Consumption Function in a Developing Economy and the Italian Experience," American Economic Review, American Economic Association, vol. 65(5), pages 825-42, December. [Downloadable!] (restricted)
  16. Mishkin, Frederic S, 1976. "Illiquidity, Consumer Durable Expenditure, and Monetary Policy," American Economic Review, American Economic Association, vol. 66(4), pages 642-54, September. [Downloadable!] (restricted)
  17. 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)
  18. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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