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On the stability of the wealth effect

Author

Listed:
  • Pedro Bação

    (University of Coimbra and GEMF)

  • Fernando Alexandre

    (Universidade do Minho and NIPE)

  • Vasco J. Gabriel

    (University of Surrey, UK and NIPE)

Abstract

We argue that the equation commonly used in the estimation of the wealth effect on consumption might be unsuitable for that purpose. In particular, if the usual assumptions are employed, the derivation of the equation implies that the wealth effect is indeterminate. Furthermore, it implies that the estimate of the wealth effect should decrease when asset wealth volatility increases. Estimation of a Markov-switching model of the usual long-run aggregate consumption equation provides evidence favourable to the indeterminacy hypothesis

Suggested Citation

  • Pedro Bação & Fernando Alexandre & Vasco J. Gabriel, 2006. "On the stability of the wealth effect," Computing in Economics and Finance 2006 281, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:281
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    Cited by:

    1. Blandina Oliveira & Adelino Fortunato, 2008. "The dynamics of the growth of firms: evidence from the services sector," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(3), pages 293-312, July.

    More about this item

    Keywords

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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