IDEAS home Printed from https://ideas.repec.org/p/fip/fednrp/9821.html
   My bibliography  Save this paper

How important is the stock market effect on consumption?

Author

Listed:
  • Sydney Ludvigson
  • Charles Steindel

Abstract

The 1990s have seen astonishing growth in the stock market portfolios of Americans, which many have argued has been a major force behind the growth of consumer spending. This paper reviews the relationship between the stock market and the consumer. Using a variety of econometric techniques and specifications, we fail to find evidence of a stable relationship between aggregate consumer spending and changes in aggregate household wealth. While stock market gains have surely provided some support for consumer spending, our hard knowledge is too limited to feel comfortable relying on estimates of the stock market effect in macroeconomic forecasts.

Suggested Citation

  • Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednrp:9821
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9821.pdf
    Download Restriction: no
    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9821.html
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Charles Steindel, 1981. "The determinants of private saving," Monograph, Board of Governors of the Federal Reserve System (U.S.), number 1981tdop.
    3. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    5. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
    6. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
    7. Charles Steindel, 1992. "Changes in the U.S. cycle: shifts in capital spending and balance sheet changes," Research Paper 9224, Federal Reserve Bank of New York.
    8. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    9. repec:fth:harver:1435 is not listed on IDEAS
    10. Modigliani, Franco & Tarantelli, E, 1975. "The Consumption Function in a Developing Economy and the Italian Experience," American Economic Review, American Economic Association, vol. 65(5), pages 825-842, December.
    11. Gali, Jordi, 1990. "Finite horizons, life-cycle savings, and time-series evidence on consumption," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 433-452, December.
    12. James M. Poterba & Andrew A. Samwick, 1995. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 295-372.
    13. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    14. 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.
    15. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    16. Martha Starr-McCluer, 2002. "Stock Market Wealth and Consumer Spending," Economic Inquiry, Western Economic Association International, vol. 40(1), pages 69-79, January.
    17. Mishkin, Frederic S, 1976. "Illiquidity, Consumer Durable Expenditure, and Monetary Policy," American Economic Review, American Economic Association, vol. 66(4), pages 642-654, September.
    18. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Lettau & Sydney Ludvigson, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, June.
    2. 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.
    3. Lettau, Martin & Ludvigson, Sydney C., 2005. "Expected returns and expected dividend growth," Journal of Financial Economics, Elsevier, vol. 76(3), pages 583-626, June.
    4. Jeremy B. Rudd & Karl Whelan, 2002. "A note on the cointegration of consumption, income, and wealth," Finance and Economics Discussion Series 2002-53, Board of Governors of the Federal Reserve System (U.S.).
    5. Sousa, Ricardo M., 2009. "Wealth effects on consumption: evidence from the euro area," Working Paper Series 1050, European Central Bank.
    6. MacDonald, Ronald & Molana, Hassan, 2004. "Can portfolio adjustments explain deviations of consumption from permanent income?: An empirical study of UK data," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 313-331, December.
    7. Andriy Avramenko & Michael R. Donihue, 2006. "Decomposing consumer wealth effects: evidence on the role of real estate assets following the wealth cycle of 1990-2002," Working Papers 06-15, Federal Reserve Bank of Boston.
    8. Ricardo M. Sousa, 2003. "Property of stocks and wealth effects on consumption," NIPE Working Papers 2/2003, NIPE - Universidade do Minho.
    9. Peltonen, Tuomas A. & Sousa, Ricardo M. & Vansteenkiste, Isabel S., 2012. "Wealth effects in emerging market economies," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 155-166.
    10. Jeremy Rudd & Karl Whelan, 2006. "Empirical Proxies for the Consumption-Wealth Ratio," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 34-51, January.
    11. Brunila, Anne, 1997. "Current income and private consumption : Saving decisions : Testing the finite horizon model," Research Discussion Papers 6/1997, Bank of Finland.
    12. repec:zbw:bofrdp:1997_006 is not listed on IDEAS
    13. de Brouwer,Gordon, 1999. "Financial Integration in East Asia," Cambridge Books, Cambridge University Press, number 9780521651486, December.
    14. Athanasopoulos, George & de Carvalho Guillén, Osmani Teixeira & Issler, João Victor & Vahid, Farshid, 2011. "Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions," Journal of Econometrics, Elsevier, vol. 164(1), pages 116-129, September.
    15. Willman, Alpo, 2007. "Sequential optimization, front-loaded information, and U.S. consumption," Working Paper Series 765, European Central Bank.
    16. Engsted, Tom, 2002. "Measuring noise in the Permanent Income Hypothesis," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 353-370, September.
    17. Maslov, Alexander, 2011. "Inflationary Handicap Of The Monetary Transmission Mechanism: Evidence From Russia," MPRA Paper 50036, University Library of Munich, Germany, revised 12 Apr 2012.
    18. Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March.
    19. Hahm, Joon-Ho, 1998. "Consumption adjustment to real interest rates: Intertemporal substitution revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 293-320, February.
    20. Hansen, Hermann-Josef, 1996. "Der Einfluß der Zinsen auf den privaten Verbrauch in Deutschland," Discussion Paper Series 1: Economic Studies 1996,03, Deutsche Bundesbank.
    21. Martin Lettau & Sydney C. Ludvigson, 2014. "Shocks and Crashes," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 293-354.

    More about this item

    Keywords

    Investments; Wealth; Consumption (Economics);
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednrp:9821. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.