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Does wealth affect consumption? Evidence for Italy

  • Monica Paiella

    ()

    (Banca d'Italia)

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.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 510.

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Date of creation: Jul 2004
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Handle: RePEc:bdi:wptemi:td_510_04
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  1. Andrea Brandolini & Luigi Cannari & Giovanni D'Alessio & Ivan Faiella, 2004. "Household Wealth Distribution in Italy in the 1990s," Temi di discussione (Economic working papers) 530, Bank of Italy, Economic Research and International Relations Area.
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  3. Monica Paiella, 2003. "Revisiting the Implications of Heterogeneity in Financial Market Participation for the C-CAPM," Temi di discussione (Economic working papers) 473, Bank of Italy, Economic Research and International Relations Area.
  4. 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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  17. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series 2001-09, Board of Governors of the Federal Reserve System (U.S.).
  18. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
  19. Erich Battistin & Raffaele Miniaci & Guglielmo Weber, 2003. "What do we learn from recall consumption data?," Temi di discussione (Economic working papers) 466, Bank of Italy, Economic Research and International Relations Area.
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