How Large are Housing and Financial Wealth Effects? A New Approach – Christopher D. Carroll, Johns Hopkins University – Department of Economics; National Bureau of Economic Research (NBER); Jiri Slacalek, European Central Bank (ECB), Misuzu Otsuka, December 17, 2010, ECB Working Paper No. 1283
“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 $1 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.”
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