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Disentangling the wealth effect: a cohort analysis of household saving in the 1990s

  • Dean M. Maki
  • Michael G. Palumbo
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    In the U.S., household net worth rose substantially in the latter half of the 1990s and the personal saving rate dropped sharply. Researchers do not agree about just what behavior links these two events, or how to interpret the negative correlation between wealth and the saving rate over a longer time span. In this paper, we combine household-level data from the triennial Survey of Consumer Finances with quarterly, aggregate data from the Flow of Funds Accounts to estimate net worth and saving for different cohorts of households in the 1990s. We find that the groups of households whose balance sheets were boosted the most by surging equity prices were also the groups that substantially decreased their saving rates. Further, econometric analysis of these data produces propensities to consume out of wealth in the range of typical estimates obtained from aggregate data. Taken together, our results corroborate a direct view of the wealth effect on consumption.

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    File URL: http://www.federalreserve.gov/pubs/feds/2001/200121/200121abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/2001/200121/200121pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-21.

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    Date of creation: 2001
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    Handle: RePEc:fip:fedgfe:2001-21
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    1. Muellbauer, John, 1994. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 1-41, Summer.
    2. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 29-51.
    3. Poterba, J.M. & Samwick, A.A., 1996. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Working papers 96-2, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
    5. Rochelle L. Antoniewicz, 1996. "A comparison of the household sector from the Flow of Funds Accounts and the Survey of Consumer Finances," Finance and Economics Discussion Series 96-26, Board of Governors of the Federal Reserve System (U.S.).
    6. 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.).
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