How Large are Housing and Financial Wealth Effects? A New Approach

By Christopher D. Carroll, Misuzu Otsuka, Jiří Slačálek. Social Science Research Network, 2011

402 citations recorded by the source corpus.

This paper presents a simple new method for measuring `wealth effects' on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption `habits') to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector. JEL Classification: E21, E32, C22

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/df698d996eba1c9f069d72a7cf1cff4811853a2e

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Citations in the corpus

Stock Market Wealth and the Real Economy: A Local Labor Market Approach (2019, methodology): “The literature using aggregate time series data finds mixed evidence (see e.g. Poterba and Samwick, 1995; Davis and Palumbo, 2001; Lettau et al., 2002; Lettau and Ludvigson, 2004; Carroll et al., 2011).”
CREDIT, HOUSING COLLATERAL, AND CONSUMPTION: EVIDENCE FROM JAPAN, THE U.K., AND THE U.S. (2012, background): “Likewise, the higher MPC of housing wealth (given more liberal mortgage credit) compared to that of illiquid financial wealth supports the findings of Benjamin et al. (2004), Case et al. (2005), and Carroll et al. (2011).”
House Prices and Consumer Spending (2015, neutral): “11Case et al. (2013) find elasticities from 0.03 to 0.18, with most of the their estimates centered around 0.10, while Carroll et al. (2011) find an immediate (next-quarter) elasticity of 0.047, with an eventual elasticity of 0.21.”
Household Balance Sheets, Consumption, and the Economic Slump* (2013, neutral): “It includes Muellbauer and Murphy (1997), Attanasio and Weber (1994), Lehnert (2004), Case, Quigley, and Shiller (2005 and 2013), Haurin and Rosenthal (2006), Campbell and Cocco (2007), Greenspan and Kennedy (2007), and Bostic, Gabriel, and Painter (2009), and Carroll, Otsuka, and Slacalek (2011)).”
Wealth Shocks, Unemployment Shocks and Consumption in the Wake of the Great Recession (2015, neutral): “One should also keep in mind the possibility that the long-term effect of housing losses on consumption could be larger than the short-term one (Carroll et al., 2011).”
Stock Market Returns and Consumption (2020, neutral): “Davis and Palumbo (2001), Case, Quigley and Shiller (2005, 2011), Carroll, Otsuka, and Slacalek (2011) and Carroll and Zhou (2012) are examples of studies employing aggregate and regional variation in housing and stock wealth and consumption.”