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Wealth Effects and Macroeconomic Dynamics – Evidence from Indian Economy

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  • Swamy, Vighneswara

Abstract

The wealth effects on consumption are a subject of continuing interest to economists. The conventional wisdom states that fluctuations in household wealth have caused major fluctuations in economic activity. This study analyses the macroeconomic dynamics of wealth effects in India and examines the nexus between the changes in housing wealth, financial wealth, and consumer spending. Using the quarterly data for the period 2005:1–2016:1, I estimate vector autoregression models and vector error-correction models, relating consumption to income and wealth measures. I find a statistically significant and rather large effect of housing wealth upon household consumption. The results show that (i) wealth effects are statistically significant and comparatively substantial in magnitude (ii) housing wealth effects tend to be greater while stock market wealth effects are considerable (iii) private consumption responses to the shocks to housing market wealth are relatively stronger than to the shocks in stock market wealth. There is a bidirectional causality running from private consumption to the two wealth forms and vice versa. Overall, the private consumption expenditure response to the changes in different wealth forms is observed to be substantial and significant.

Suggested Citation

  • Swamy, Vighneswara, 2017. "Wealth Effects and Macroeconomic Dynamics – Evidence from Indian Economy," MPRA Paper 76836, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:76836
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    More about this item

    Keywords

    wealth effects; consumption; stock price; housing price; economic growth; inflation; fiscal deficit; exchange rate;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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