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On the Stability of the Wealth Effect

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  • Fernando Alexandre

    (University of Minho)

  • Pedro Bação

    (University of Coimbra)

  • Vasco J. Gabriel

    (University of Surrey)

Abstract

Evidence of instability of the wealth effect in the USA is presented through the estimation of a Markov switching model of the long-run aggregate consumption function. The dating of the regimes appears to bear relation to movements in asset prices. A model-based explanation of the findings is suggested, highlighting the importance of the short-run relation between consumption, income and wealth in explaining the estimated long-run coefficients.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2005/DP14-05.pdf
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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1405.

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Length: 12 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:sur:surrec:1405

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Keywords: Parameter instability; Markov switching; Consumption; Wealth effect;

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References

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  1. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
  2. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
  3. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  4. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
  5. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  6. Vasco Gabriel & Fernando Alexandre & Pedro Bação, 2007. "The Consumption-Wealth Ratio Under Asymmetric Adjustment," GEMF Working Papers 2007-06, GEMF - Faculdade de Economia, Universidade de Coimbra.
  7. Yash P. Mehra, 2001. "The wealth effect in empirical life-cycle aggregate consumption equations," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 45-67.
  8. Carrasco, Marine, 2002. "Misspecified Structural Change, Threshold, and Markov-switching models," Journal of Econometrics, Elsevier, vol. 109(2), pages 239-273, August.
  9. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1997. "Cointegration and Changes in Regime: The Japanese Consumption Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 151-68, March-Apr.
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Cited by:
  1. Blandina Oliveira & Adelino Fortunato, 2005. "The Dynamics of the Growth of Firms: Evidence from the Services Sector," GEMF Working Papers 2005-04, GEMF - Faculdade de Economia, Universidade de Coimbra.

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