2008
Abstract:
Fluctuations in the stock market and in house values over the course of recent years have
led to renewed macroeconomic policy debate as regards the effects of financial and
housing wealth in the determination of consumer spending. This research assembles a
unique matched sample of household data from the Survey of Consumer Finance and the
Consumer Expenditure Survey to estimate the consumption effects of financial and
housing wealth. The micro-data permit numerous innovations in the assessment of
wealth effects, including an analysis of the impact of wealth on both durable and nondurable consumption and a comparison of wealth effects as derive from gross versus
after-debt measures of financial and housing wealth. Further, the research seeks to assess
robustness of those estimates to deviations from trend and volatility in financial and
housing wealth and among credit constrained and non-credit constrained households.
Overall, research findings indicate relatively large housing wealth effects. Among
homeowners, the housing wealth elasticities are estimated in the range of .06 over the
1989 - 2001 period. In marked contrast, the estimated elasticities of consumption
spending with respect to financial wealth are smaller in magnitude and are in the range of
.02. Further, the estimated wealth elasticities appear robust to deviations from trend and
volatility in the wealth measures. Research findings support the hypothesized behavioral
distinction in household consumption spending across durable versus non-durable
categories. Consumption propensities also diverge sharply across the credit constrained
and non-credit constrained households. Finally, there is little difference in wealth
elasticities derived from measures of home equity versus house values.
Research findings suggest the possibility of sizable reverse wealth effects. For example,
a 10 percent decline in housing wealth from 2005 levels translates into a 1 percentage
point decline in real GDP growth, a sizable reduction relative to the approximate 4
percent real GDP growth evidenced in recent years. Results of the analysis point to the
sizable economy-wide risks associated with the recent retrenchment in house values.
