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Decomposing Consumer Wealth Effects: Evidence on the Role of Real Estate Assets Following the Wealth Cycle of 1990-2002

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  • Donihue Michael

    (Colby College)

  • Avramenko Andriy

    (Colby College)

Abstract

During the period from 1990 to 2002, U.S. households experienced a dramatic wealth cycle, induced by a 369 percent appreciation in the value of real per capita liquid stock-market assets, followed by a 55 percent decline. However, despite predictions at the time by some analysts relying on life-cycle models of consumption, consumer spending in real terms continued to rise throughout this period. Using data that include the period from 1990 to 2005, traditional approaches to estimating macroeconomic wealth effects on consumption confront two puzzles: (i) econometric evidence of a stable cointegrating relationship among consumption, income, and wealth is weak at best; and (ii) life-cycle models that rely on aggregate measures of wealth cannot explain why consumption did not collapse when the value of stock-market assets declined so dramatically. We address both puzzles by decomposing wealth according to the liquidity of household assets. In particular, we find that significant appreciation in the value of real estate assets that occurred after the peak of the wealth cycle helped to sustain consumer spending from 2000 to 2005.

Suggested Citation

  • Donihue Michael & Avramenko Andriy, 2007. "Decomposing Consumer Wealth Effects: Evidence on the Role of Real Estate Assets Following the Wealth Cycle of 1990-2002," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-33, August.
    • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:25
    DOI: 10.2202/1935-1690.1472
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    Cited by:

    1. Caporale, Guglielmo Maria & Costantini, Mauro & Paradiso, Antonio, 2013. "Re-examining the decline in the US saving rate: The impact of mortgage equity withdrawal," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 215-225.
    2. Chen, Nan-Kuang & Chen, Shiu-Sheng & Chou, Yu-Hsi, 2010. "House prices, collateral constraint, and the asymmetric effect on consumption," Journal of Housing Economics, Elsevier, vol. 19(1), pages 26-37, March.
    3. E. M uez & A.R. Mart󹑺-Ca & I. P鲥z-Soba, 2014. "From real estate to consumption: the role of credit markets in the USA," Applied Economics, Taylor & Francis Journals, vol. 46(18), pages 2178-2189, June.
    4. Konstantina Manou & Panagiotis Palaios & Evangelia Papapetrou, 2019. "Housing wealth, household debt and financial assets: are there implications for consumption?," Working Papers 263, Bank of Greece.
    5. Talan B. Işcan, 2008. "Productivity Growth and the Future of the U.S. Saving Rate," Working Papers daleconwp2009-02, Dalhousie University, Department of Economics.
    6. İşcan, Talan B., 2011. "Productivity growth and the U.S. saving rate," Economic Modelling, Elsevier, vol. 28(1), pages 501-514.
    7. Márquez, Elena & Martínez-Cañete, Ana R. & Pérez-Soba, Inés, 2013. "Wealth shocks, credit conditions and asymmetric consumption response: Empirical evidence for the UK," Economic Modelling, Elsevier, vol. 33(C), pages 357-366.
    8. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.
    9. Barrell, Ray & Costantini, Mauro & Meco, Iris, 2015. "Housing wealth, financial wealth, and consumption: New evidence for Italy and the UK," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 316-323.
    10. Yener Coskun & Christos Bouras & Rangan Gupta & Mark E. Wohar, 2021. "Multi-Horizon Financial and Housing Wealth Effects across the U.S. States," Sustainability, MDPI, vol. 13(3), pages 1-20, January.
    11. Yijia Wen & Li Fang & Qing Li, 2022. "Commercial Real Estate Market at a Crossroads: The Impact of COVID-19 and the Implications to Future Cities," Sustainability, MDPI, vol. 14(19), pages 1-16, October.
    12. Gabriela Lopes de Castro, 2007. "The Wealth Effect on Consumption in the Portuguese Economy," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    13. Yener Coskun & Nicholas Apergis & Esra Alp Coskun, 2022. "Nonlinear responses of consumption to wealth, income, and interest rate shocks," Empirical Economics, Springer, vol. 63(3), pages 1293-1335, September.

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