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Equity prices, household wealth, and consumption growth in foreign industrial countries: wealth effects in the 1990s

  • Carol C. Bertaut
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    Although most recent empirical research regarding the size and significance of the impact of changes in wealth on consumption has looked for such effects in the United States, equity prices in the 1990s rose considerably in most other industrial countries as well. This paper investigates the strength of the wealth effect across countries. Using a variety of methods, I find evidence of significant wealth effects in the United Kingdom and Canada of a size comparable to that in the United States, reflecting the importance of equities in aggregate household wealth in these countries. A significant wealth effect is also evident in Japan, but because household wealth has changed little on balance in Japan in recent years, this channel has been less important in explaining Japanese consumption growth in the second half of the 1990s. Despite a rapid appreciation in equity prices and an increase in equity ownership in the major continental European countries since 1995, equities remain a less important form of household wealth in most of these countries, and the consumption response to changes in wealth remains limited. However, in some smaller European countries where equity issuance is more common, the emerging evidence suggests that wealth effects may be more important.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 724.

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    Date of creation: 2002
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    Handle: RePEc:fip:fedgif:724
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    1. Carol Bertaut & Martha Starr-McCluer, 2000. "Household portfolios in the United States," Finance and Economics Discussion Series 2000-26, Board of Governors of the Federal Reserve System (U.S.).
    2. Maria W. Otoo, 1999. "Consumer sentiment and the stock market," Finance and Economics Discussion Series 1999-60, Board of Governors of the Federal Reserve System (U.S.).
    3. Martha Starr-McCluer, 1998. "Stock market wealth and consumer spending," Finance and Economics Discussion Series 1998-20, Board of Governors of the Federal Reserve System (U.S.).
    4. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    5. 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.
    6. Luigi Guiso & Tullio Jappelli, 2000. "Household Portfolios in Italy," CSEF Working Papers 43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    7. Torsten Sløk & Hali J. Edison, 2001. "Wealth Effects and the New Economy," IMF Working Papers 01/77, International Monetary Fund.
    8. 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.
    9. Shirvani Hassan & Wilbrate Barry, 2000. "Does Consumption Respond More Strongly to Stock Market Declines Than to Increases?," International Economic Journal, Taylor & Francis Journals, vol. 14(3), pages 41-49.
    10. 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.).
    11. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
    12. Corinne Houizot & Francisco Serranito & Hélène Baudchon & Catherine Mathieu, 2000. "Plus-values, consommation et épargne. Une estimation de l'effet richesse aux États- Unis et au Royaume- Uni," Revue de l'OFCE, Programme National Persée, vol. 73(1), pages 197-240.
    13. repec:cai:reofsp:reof_p2000_73n1_0197 is not listed on IDEAS
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