Disentangling the Wealth Effect: A Cohort Analysis of Household Saving in the 1990s

By Dean M. Maki, Michael G. Palumbo. 2001

207 citations recorded by the source corpus.

In the U.S., household net worth rose substantially in the latter half of the 1990s and the personal saving rate dropped sharply. Researchers do not agree about just what behavior links these two events, or how to interpret the negative correlation between wealth and the saving rate over a longer time span. In this paper, we combine household-level data from the triennial Survey of Consumer Finances with quarterly, aggregate data from the Flow of Funds Accounts to estimate net worth and saving for different cohorts of households in the 1990s. We find that the groups of households whose balance sheets were boosted the most by surging equity prices were also the groups that substantially decreased their saving rates. Further, econometric analysis of these data produces propensities to consume out of wealth in the range of typical estimates obtained from aggregate data. Taken together, our results corroborate a direct view of the wealth effect on consumption.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/c782d11e0396731416d3b350aee6e8ca634b242d

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Economics and Econometrics

Citations in the corpus

Reconsidering the Investment-Profit Nexus in Finance-Led Economies: An ARDL-Based Approach (2008, background): “Noting further that the richest income quintile held between 80 and 90 per cent of corporate equity in the 1990s (Maki and Palumbo, 2001, p. 24) and that capital gains from rising equity prices add to shareholders’ wealth and thus potentially to the ability and willingness to consume, the ‘puzzling…”
Inequality, the Great Recession, and Slow Recovery (2014, unknown): “To estimate consumption flows for the bottom 95 percent and top 5 percent we follow the approach of Maki and Palumbo (2001).”
Handbook of Consumer Finance Research (2008, background): “The consequences were both micro and macro, ranging from extraordinarily positive to devastatingly negative (Maki & Michael, 2001 ) and constituting both the cause and the result of structural change in our economic and social systems (Xiao & Yao, 2014 ).”
Trickle-Down Consumption (2016, unknown): “In fact, Maki and Palumbo (2001) suggest strong consumption to income elasticities among the rich during the 1990s because of wealth effects.”
THE UK HOUSING MARKET AND THE MONETARY POLICY TRANSMISSION MECHANISM: AN SVAR APPROACH (2008, background): “For the US, Maki and Palumbo (2001) find that the propensity to consume out of household net wealth is between 3% and 5%, which has had substantial effects on the US economy.”
Does Stock Market Wealth Matter for Consumption (2001, methodology): “3 In addition to the micro-data studies discussed above, Maki and Palumbo (2001) combine aggregate Flow of Funds data with information from the Survey of Consumer Finances to create cohort estimates of saving by income and education groups and find that the decline in saving in the 1990s was…”
Fiscal Policies, the Current Account and Ricardian Equivalence (2008, background): “Conceptually, 5See Davey (2001), Maki and Palumbo (2001) and Strauss (2000).”
Rising household debt: Its causes and macroeconomic implications--a long-period analysis (2008, background): “1 A radically different interpretation of the falling saving rate of the overall household sector has been put forward by Maki and Palumbo (2001).”
Is flexible labour good for innovation? : Evidence from firm-level data (2014, background): “Meanwhile, we realise that higher growth was driven by an impressive growth of debt related to bubbles in asset markets (Maki and Palumbo, 2001; Palley, 2009).”
A synthetic, stock--flow consistent macroeconomic model of 'financialisation' (2009, unknown): “…the US personal savings rate in the recent past can be fully explained by the reduced propensity to save of the highest income quintile alone, which holds 80-90 per cent of equity and has particularly bene-fited from both dividend payments and rising financial wealth (see Maki and Palumbo, 2001).”
The Consumption Response to Income Changes (2009, unknown): “The Modigliani and Brumberg (1954) and Friedman (1957) celebrated life-cycle and 1 A related literature looks at the effect of wealth shocks on consumption (Maki and Palumbo, 2001).”
The political economy debate on ‘financialization’ – a macroeconomic perspective (2009, unknown): “terestingly, some authors have found that during the 1990s especially the richest income quintile has reduced its savings rate significantly (Table 3; Duménil and Lévy, 2003; IMF, 2002; Maki and Palumbo, 2001).”
Rising inequality as a cause of the present crisis (2015, background): “Maki and Palumbo claim that ‘all of the consumption boom really can be attributed to the richest groups of households’ (Maki and Palumbo, 2001, p 22).”