Advanced Search
MyIDEAS: Login to save this paper or follow this series

The International Wealth Channel: A Global Error-Correcting Analysis

Contents:

Author Info

  • Nils Holinski
  • Robert Vermeulen

    ()
    (CREA, University of Luxembourg)

Abstract

This paper analyzes the empirical link between asset prices, consumption and the trade balance using a global macroeconometric model developed by Pesaran, Schuermann, and Weiner (2004). The model is estimated for 29 countries with quarterly data over the period 1981Q1 - 2006Q4. Motivated by increasing international _nancial and real integration, and pronounced cycles in stock and housing prices, we employ generalized impulse response functions for a group of _ve of the world's most industrialized countries and show that shocks to asset prices transmit into the trade balance. We refer to this transmission channel as the international wealth channel and _nd it to be present in the US, UK and, to a lesser extent, in France, but absent in Japan and Germany. More speci_cally, when we _nd the international wealth channel at work as stock price changes are transmitted through consumption into the trade balance, whereas housing price changes are transmitted through investment into the trade balance.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://wwwfr.uni.lu/content/download/28781/339982/file/2010_04-The%20International%20Wealth%20Channel_A%20Global%20Error-Correcting%20Analysis.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 10-04.

as in new window
Length:
Date of creation: 2010
Date of revision:
Handle: RePEc:luc:wpaper:10-04

Contact details of provider:
Postal: 162a avenue de la Faïencerie, L-1511 Luxembourg
Phone: (+352) 46 66 44
Fax: (+352) 46 66 44 ext 633
Email:
Web page: http://wwwen.uni.lu/research/fdef/crea
More information through EDIRC

Related research

Keywords: trade balance; wealth effect; global imbalances; GVAR; international transmission;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Palumbo, Michael & Rudd, Jeremy & Whelan, Karl, 2006. "On the Relationships Between Real Consumption, Income, and Wealth," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 24, pages 1-11, January.
  2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External Wealth, the Trade Balance and the Real Exchange Rate," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3153, C.E.P.R. Discussion Papers.
  3. Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2010. "Asset prices, exchange rates and the current account," European Economic Review, Elsevier, Elsevier, vol. 54(5), pages 643-658, July.
  4. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of Global Imbalances and Low Interest Rates," 2006 Meeting Papers, Society for Economic Dynamics 894, Society for Economic Dynamics.
  5. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 5(1), pages 1-34, May.
  6. Philip R. Lane & Gian Maria Milesi-Ferretti, 2008. "International Investment Patterns," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 538-549, August.
  7. Dees, S. & di Mauro, F. & Pesaran, M.H. & Smith, L.V., 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0518, Faculty of Economics, University of Cambridge.
  8. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  9. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports, Federal Reserve Bank of New York 77, Federal Reserve Bank of New York.
  10. Robert J. Barro, 1989. "The Stock Market and Investment," NBER Working Papers 2925, National Bureau of Economic Research, Inc.
  11. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2006. "Productivity, External Balance and Exchange Rates: Evidence on the Transmission Mechanism Among G7 Countries," NBER Working Papers 12483, National Bureau of Economic Research, Inc.
  12. Matteo Iacoviello & Stefano Neri, 2007. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," Boston College Working Papers in Economics, Boston College Department of Economics 659, Boston College Department of Economics, revised 23 Oct 2009.
  13. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 2005. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," American Economic Review, American Economic Association, American Economic Association, vol. 95(2), pages 334-339, May.
  14. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  15. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  16. David Laibson & Johanna Mollerstrom, 2010. "Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 120(544), pages 354-374, 05.
  17. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research, National Bank of Belgium 35, National Bank of Belgium.
  18. Alexander Ludwig & Torsten Sløk, 2004. "The relationship between stock prices, house prices and consumption in OECD countries," MEA discussion paper series, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy 04044, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  19. Portes, Richard & Rey, Hélène, 1999. "The Determinants of Cross-Border Equity Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2225, C.E.P.R. Discussion Papers.
  20. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
  21. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  22. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9710, Faculty of Economics, University of Cambridge.
  23. Pesaran M.H. & Schuermann T. & Weiner S.M., 2004. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 22, pages 129-162, April.
  24. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
  25. Anders Bergvall, 2004. "What Determines Real Exchange Rates? The Nordic Countries," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 106(2), pages 315-337, 06.
  26. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  27. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 119-147, September.
  28. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Jul, pages 29-51.
  29. Angela Black & Patricia Fraser & Martin Hoesli, 2006. "House Prices, Fundamentals and Bubbles," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 33(9-10), pages 1535-1555.
  30. Bems, Rudolfs & Dedola, Luca & Smets, Frank, 2007. "US imbalances: The role of technology and policy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(4), pages 523-545, June.
  31. Richards, Anthony J., 1995. "Comovements in national stock market returns: Evidence of predictability, but not cointegration," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(3), pages 631-654, December.
  32. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(1), pages 95-124, February.
  33. Silvia Sgherri & Alessandro Galesi, 2009. "Regional Financial Spillovers Across Europe," IMF Working Papers 09/23, International Monetary Fund.
  34. Fratzscher, Marcel & Straub, Roland, 2009. "Asset prices and current account fluctuations in G7 economies," Working Paper Series, European Central Bank 1014, European Central Bank.
  35. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(1), pages 53-68, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Holinski Nils & Kool Clemens & Muysken Joan, 2009. "International Portfolio Balance – Modeling the External Adjustment Process," Research Memorandum 033, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Timo Bettendorf, 2012. "Investigating Global Imbalances: Empirical Evidence from a GVAR Approach," Studies in Economics, Department of Economics, University of Kent 1217, Department of Economics, University of Kent.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:luc:wpaper:10-04. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elisa Ferreira).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.