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Time-Varying Effects of Housing and Stock Prices on U.S. Consumption

  • Beatrice D. Simo-Kengne

    (University of Pretoria)

  • Stephen M. Miller

    (University of Nevada, Las Vegas and University of Connecticut)

  • Rangan Gupta

    (University of Pretoria)

  • Goodness C. Aye

    (University of Pretoria)

This paper applies a time-varying parameter vector autoregressive (TVP-VAR) approach to estimate the relative effects of housing and stock prices on US consumption over time. We use annual data from 1890 to 2012 and find that over different horizons and over time, generally the housing price positively affects consumption while the stock price negatively affects consumption. These opposite responses to changes in housing and stock prices suggest different mechanisms through which wealth affects consumption. Further, the housing price effect proves larger in absolute value than the stock price effect after 1980. Between 1980 and 2007, housing wealth generally exerted a larger effect on consumption. This sub-period includes the 1997/2002 asset price boom/bust where house prices continued to rise moderately as stock prices fell. Finally, the co-occurrence of the decline in both housing and stock prices during the 2007-2009 episode produced bigger effects of the housing price for the first five years of the impulse responses while the higher magnitude of the stock price effect appears in the 6-year horizon. These findings suggest that the magnitude of the relative price effects differs with both time and horizons and also depends on whether prices increase or decrease.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2013-13.

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Length: 23 pages
Date of creation: Jun 2013
Date of revision:
Publication status: Forthcoming in Journal of Real Estate Finance and Economics
Handle: RePEc:uct:uconnp:2013-13
Note: Stephen M. Miller is corresponding author.
Contact details of provider: Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063
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  1. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," NBER Working Papers 12746, National Bureau of Economic Research, Inc.
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  11. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
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  13. Nikola Dvornak & Marion Kohler, 2003. "Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia," RBA Research Discussion Papers rdp2003-07, Reserve Bank of Australia.
  14. John D. Benjamin & Peter Chinloy & G. Donald Jud, 2004. "Real Estate Versus Financial Wealth in Consumption," The Journal of Real Estate Finance and Economics, Springer, vol. 29(3), pages 341-354, November.
  15. Jeremy A Leonard, 2010. "The Impact of the Housing Market Boom and Bust on Consumption Spending," Business Economics, Palgrave Macmillan, vol. 45(2), pages 83-93, April.
  16. Zhou Xia & Carroll Christopher D., 2012. "Dynamics of Wealth and Consumption: New and Improved Measures for U.S. States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-44, March.
  17. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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