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Stock Market Wealth and Consumer Spending

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  • Martha Starr-McCluer

Abstract

This article investigates the effects of stock market wealth on consumer spending. Traditional macroeconometric models estimate that a dollar's increase in stock wealth boosts consumption by three to seven cents. With the substantial 1990s rise in stock prices, the nature and magnitude of this "wealth effect" have been much debated. After describing the issues and previous research, I present new evidence from a well-known consumer survey. The results are broadly consistent with life-cycle saving and a modest wealth effect: most stockholders reported no appreciable effect of stock prices on their saving or spending, but many mentioned "retirement saving" in explaining their behavior. Copyright 2002, Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 40 (2002)
Issue (Month): 1 (January)
Pages: 69-79

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Handle: RePEc:oup:ecinqu:v:40:y:2002:i:1:p:69-79
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  1. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Jeff Dominitz & Charles F. Manski, 1996. "Perceptions of Economic Insecurity: Evidence from the Survey of Economic Expectations," NBER Working Papers 5690, National Bureau of Economic Research, Inc.
  3. Wilhelm, M.O., 1990. "Bequest Behavior And The Effect Of Heirs' Earnings: Testing The Altruistic Model Of Bequests," Papers 9-90-12, Pennsylvania State - Department of Economics.
  4. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004. "Do the Rich Save More?," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 397-444, April.
  5. Thaler, Richard H, 1994. "Psychology and Savings Policies," American Economic Review, American Economic Association, vol. 84(2), pages 186-92, May.
  6. Friend, Irwin & Lieberman, Charles, 1975. "Short-Run Asset Effects on Household Saving and Consumption: The Cross-Section Evidence," American Economic Review, American Economic Association, vol. 65(4), pages 624-33, September.
  7. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
  8. Davies, James B, 1981. "Uncertain Lifetime, Consumption, and Dissaving in Retirement," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 561-77, June.
  9. John Laitner & F. Thomas Juster, 1993. "New evidence on altruism: a study of TIAA-CREF retirees," Discussion Paper / Institute for Empirical Macroeconomics 86, Federal Reserve Bank of Minneapolis.
  10. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  11. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  12. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family finances in the U.S.: recent evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-24.
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