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A Reexamination of the Wealth Effect and Uncertainty Effect

  • Ling He
  • Joseph McGarrity
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    In an influential article, [Romer, C. “The Great Crash and the Onset of the Great Depression,” Quarterly Journal of Economics, 105, 1990, pp. 597–624.] estimates the magnitudes of the uncertainty and wealth effects. She reports that before and after the Great Depression, the uncertainty effect has a large and statistically significant influence on durable good production, while the wealth effect is negative but negligible. When the authors of this paper change the specification of the model with respect to the amount of time necessary for stock returns to translate into changes in consumption, they reach the exact opposite conclusions that Romer does. Specifically, when the authors allow consumers 12 or more months to alter consumption behavior, rather than Romer's three, stock price uncertainty did not significantly affect the durable goods production before, during, or after the Great Depression. The authors also find that stock market returns from the previous year have a positive and statistically significant impact on the durable goods production, indicating the importance of the wealth effect. Copyright International Atlantic Economic Society 2005

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    File URL: http://hdl.handle.net/10.1007/s11294-005-2276-6
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    Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

    Volume (Year): 11 (2005)
    Issue (Month): 4 (November)
    Pages: 379-398

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    Handle: RePEc:kap:iaecre:v:11:y:2005:i:4:p:379-398
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    1. Christina D. Romer, 1988. "The Great Crash and the Onset of the Great Depression," NBER Working Papers 2639, National Bureau of Economic Research, Inc.
    2. Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 38(04), pages 918-937, December.
    3. Huang, Roger D & Kracaw, William A, 1984. " Stock Market Returns and Real Activity: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 267-73, March.
    4. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity-Premium Puzzle," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 257-330 National Bureau of Economic Research, Inc.
    5. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
    6. Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June.
    7. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
    8. G. William Schwert, 1990. "Stock Returns and Real Activity: A Century of Evidence," NBER Working Papers 3296, National Bureau of Economic Research, Inc.
    9. Karen E. Dynan & Dean M. Maki, 2001. "Does stock market wealth matter for consumption?," Finance and Economics Discussion Series 2001-23, Board of Governors of the Federal Reserve System (U.S.).
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