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Wealth Effects In Consumption: The Financial Accelerator And Banks’ Willingness To Lend

  • Jakob B Madsen
  • Hui Yao

Empirical estimates point towards wealth effects in consumption that are significantly higher than predicted by economic theory. This paper argues that the wealth effects are partly or fully driven by an unobserved macroeconomic factor such as credit conditions because asset prices affect the collateral of borrowers as well as lenders. Using an instrumental variable approach it is shown that asset prices affect durable and non-durable consumption through banks’ willingness to lend and not through the traditional wealth effect channel.

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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 56-12.

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Length: 16 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:mos:moswps:2012-56
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Department of Economics, Monash University, Victoria 3800, Australia

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  1. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
  2. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2012. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series qt6px1d1sc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  4. Sarah J. Carrington & Jakob B. Madsen, 2009. "House Prices, Credit and Willingness to Lend," Monash Economics Working Papers 23-09, Monash University, Department of Economics.
  5. John Y. Campbell & Joao F. Cocco, 2004. "How do house prices affect consumption? Evidence from micro data," 2004 Meeting Papers 304, Society for Economic Dynamics.
  6. Joseph P. Byrne & E. Philip Davis, 2003. "Disaggregate Wealth and Aggregate Consumption: an Investigation of Empirical Relationships for the G7," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(2), pages 197-220, 05.
  7. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jiri, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series 1283, European Central Bank.
  8. Karl E. Case & John M. Quigley & Robert J. Shiller, 2011. "Wealth Effects Revisited 1978-2009," Cowles Foundation Discussion Papers 1784, Cowles Foundation for Research in Economics, Yale University.
  9. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers 208, OECD Publishing.
  10. Madsen, Jakob B. & Mcaleer, Michael, 2000. "Direct Tests of the Permanent Income Hypothesis under Uncertainty, Inflationary Expectations and Liquidity Constraints," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 229-252, April.
  11. John Y. Campbell & N. Gregory Mankiw, 1987. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
  12. Antzoulatos, Angelos A. & Tsoumas, Chris, 2010. "Financial development and household portfolios - Evidence from Spain, the U.K. and the U.S," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 300-314, March.
  13. DeJuan, Joseph P. & Seater, John J., 2007. "Testing the cross-section implications of Friedman's permanent income hypothesis," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 820-849, April.
  14. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  15. Sousa, Ricardo M., 2009. "Wealth effects on consumption: evidence from the euro area," Working Paper Series 1050, European Central Bank.
  16. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
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