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Wealth Effects in Europe

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  • Sònia Muñoz
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    Abstract

    This paper investigates the increasing exposure of European households to risky financial assets and the consequent impact on the economy. I analyze household data for Italy and the United Kingdom, countries that differ dramatically in their financial structure and capital markets. I estimate an endogenous switching model with bivariate switching to overcome two important obstacles in this line of research, namely, the consumption Capital Asset Pricing Model Puzzle and the excess sensitivity puzzle. The results show that there are wealth effects in both countries. I find some evidence of liquidity constraints only in Italy and habit formation exclusively in the United Kingdom.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/30.

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    Length: 53
    Date of creation: 01 Jan 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/30

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    Keywords: Income distribution; Financial assets; Economic models; bonds; equation; equations; survey; government bonds; stock market; stockholders; correlation; statistics; stock prices; financial structure; sample selection; probability; bond; premium bonds; standard errors; corporate bonds; treasury bonds; term bonds; predictions; stock markets; financial institutions; surveys; long-term bonds; stock returns; financial markets; financial structures; covariance; normal distribution; random walk; money market; foreign bonds; stock ownership; coupon bonds; simultaneous equation; zero coupon bonds; cohort analysis; prediction; additional regressor; correlations; separation theorems; statistical correlation; econometrics; instrumental variables; savings deposits; estimation procedure; hedge funds; empirical model; opinion polls; financial economics; government agencies; data analysis; sample size; diagonal matrix; real variables; financial system; sample survey; measurement error; stock market prices; financial systems; estimation method; causation; empirical specification; sample bias; foreign stocks; optimization; stock companies; representative sample; financial innovation; present value; samples; dummy variables; hedge; money market mutual funds; government bonds net wealth; stock holdings; orthogonality; stock market fluctuations;

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