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International Wealth Effects

  • Jiri Slacalek

This paper presents a detailed investigation of the wealth effect for 16 industrial countries using the recently proposed technique that exploits the sluggishness of consumption growth. I argue that, compared to the widespread cointegration-based methodology, the approach I apply has better theoretical foundations and is more immune to parameter instability. Empirically, this new technique implies smaller magnitude of the wealth effect in the G-8 countries and larger size of the income effect. I also document that the wealth effect tends to be larger in countries with more developed financial markets and has decreased substantially in the last twenty years.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44429.de/dp596.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 596.

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Length: 21 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp596
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  1. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
  2. Alvin Tan & Graham Voss, 2003. "Consumption and Wealth in Australia," The Economic Record, The Economic Society of Australia, vol. 79(244), pages 39-56, 03.
  3. Lise Pichette & Dominique Tremblay, 2003. "Are Wealth Effects Important for Canada?," Working Papers 03-30, Bank of Canada.
  4. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  5. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06.
  6. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2005. "Consumption, Wealth and Business Cycles in Germany," CESifo Working Paper Series 1443, CESifo Group Munich.
  7. Carroll, Christopher D. & Slacalek, Jiri & Sommer, Martin, 2008. "International evidence on sticky consumption growth," Working Paper Series 0886, European Central Bank.
  8. Pietro Catte & Nathalie Girouard & Robert W.R. Price & Christophe André, 2004. "Housing Markets, Wealth and the Business Cycle," OECD Economics Department Working Papers 394, OECD Publishing.
  9. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
  10. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
  11. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  12. Rudd, Jeremy & Whelan, Karl, 2002. "A Note on the Cointegration of Consumption, Income, and Wealth," Research Technical Papers 5/RT/02, Central Bank of Ireland.
  13. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
  14. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
  15. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  16. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
  17. repec:fth:harver:1435 is not listed on IDEAS
  18. Muellbauer, John, 1986. "Habits, Rationality and Myopia in the Life-Cycle Consumption Function," CEPR Discussion Papers 112, C.E.P.R. Discussion Papers.
  19. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  20. Christopher D. Carroll & Johns Hopkins University, 2006. "Sticky Expectations and Consumption Dynamics," Computing in Economics and Finance 2006 21, Society for Computational Economics.
  21. Martin Sommer & Christopher Carroll & Jiri Slacalek, 2005. "The Epidemiology of Consumption," 2005 Meeting Papers 677, Society for Economic Dynamics.
  22. repec:ucn:oapubs:10197/228 is not listed on IDEAS
  23. Martin Sommer, 2004. "Habits, Sentiment and Predictable Income in the Dynamics of Aggregate Consumption," Macroeconomics 0408004, EconWPA.
  24. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07.
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