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This paper explores the household behavior that underlies the link between wealth and consumption at the aggregate level. One possibility is that changes in wealth directly cause changes in consumption through their effect on households' contemporaneous budget sets; another possibility is that they merely predict changes in consumption because they signal changes in future income. Previous attempts to assess the relative importance of these "direct" and "indirect" channels have yielded indeterminate results. Based on analysis of householdlevel data from the Consumer Expenditure Survey, we find that direct wealth effects begin to show up relatively quickly and continue to boost consumption growth for a number of quarters, in line with aggregate estimates. In contrast, we find that the indirect wealth channel is not an important determinant of consumption growth. We also estimate that an additional dollar of wealth leads households with moderate securities holdings to increase consumption between 5 cents and 15 cents, with the most likely gain in the lower part of this range.

In the U.S., household net worth rose substantially in the latter half of the 1990s and the personal saving rate decreased rapidly. Researchers have not reached a consensus about just how these two events are linked, or how to interpret the negative correlation between wealth and the saving rate over a longer time span. The movements in net worth and the saving rate are consistent with a direct view of the wealth effect, in which an increase in wealth directly causes households to increase their consumption and decrease their saving. However, the aggregate data do not rule out alternative explanations for the time series correlation: either indirect wealth effects or reverse causation running from changes in household saving to changes in wealth. In this paper, we analyze a unique database constructed using household-level data from the Survey of Consumer Finances and aggregate data from the Flow of Funds Accounts. These data allow us to estimate net worth and saving for different demographic groups over the period surrounding the stock market boom in the 1990s. We find that the groups of households that benefited the most from the recent runup in equity wealth-those with high incomes or who have attained some college education-were also the groups that substantially decreased their rates of saving. Further, econometric analysis of these data produces coefficient estimates for the propensity to consume out of wealth that are closely aligned with typical estimates obtained from aggregate data. Taken together, our results corroborate a direct view of the wealth effect on consumption.

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