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Property of stocks and wealth effects on consumption

Recent fluctuations of financial markets, especially, stock markets fluctuations, have revived the interest concerning the dynamics of real economic activity, namely, of private consumption. In this work, the role of stock market as a determinant of private consumption is analyzed, namely, by the consideration of wealth effects. It is also analyzed the potential differences of these effects originated by different categories of property of stocks (direct versus indirect property). Using a sample for the U. S. economy, in the period 1952:Q1 - 2001:Q4, several long-run relationships were estimated, suggesting that wealth effects associated to direct property are about 3.5 times superior to those associated to indirect property. Short-run dynamics is analyzed with the estimation of a single equation, suggesting that consumption contemporaneously answers to changes in income and in wealth and that the adjustment to long-run component is very slow, which constitutes an indicator that consumers gradually change their behaviors, possibly, due to habit formation. There is also evidence supporting the presence of the indirect channel of wealth effect.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 2/2003.

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Date of creation: 2003
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Handle: RePEc:nip:nipewp:2/2003
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