Does wealth affect consumption? Evidence for Italy

This paper analyses the dynamics of Italian household wealth over the 1990s and assesses the strength of the wealth effects on consumption, using as a benchmark the United States. In a period of sharply rising asset prices, Italian household net worth rose significantly, but on the whole individuals were net buyers of assets and they appear to have realized, directly or indirectly, only a small portion of the capital gains accrued on their wealth. This is consistent with the lack of evidence of important direct wealth effects on consumption. Financial wealth effects turn out to be small because Italian households are not large scale owners of financial assets, even though their marginal propensity to consume out of financial wealth lies within the range commonly reported for the US and other industrialized countries. By contrast, housing market effects are small, even smaller than financial market effects, despite widespread homeownership, because the marginal propensity to consume out of real assets is very low. The propensity to consume out of financial wealth has tended to diminish as pension reforms have reduced household pension wealth. On the other hand, the propensity to consume out of real wealth has increased as financial deregulation and the intensification of competition among financial institution have eased credit constraints for households.