Does Stock Market Wealth Matter for Consumption?

Abstract

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.

Cognitive abilities and portfolio choice

“…Limited participation and changes in participation over time are relevant also for studying the equity premium puzzle (Mankiw and Zeldes, 1991;Attanasio, Banks and Tanner, 2002), the distribution of wealth (Guvenen, 2006), household choices regarding individual retirement accounts (Bernheim and Garrett, 2003), and wealth effects on consumption (Dynan and Maki, 2001). …”

Have the US Macro-Financial Linkages Changed? The Balance Sheet Dimension

“…Moreover, taking into account that an increasing share of that debt is being held by foreign investors, the sustainability of the US public finances are increasingly being determined by the external demand for its debt. 48 More on this in the subsequent subsection.…”

“…When consumption is above (below) the shared trend with labor and asset incomes, consumers are expecting the stock return to rise (fall), and therefore adapt their current and future consumption based on these expectations. Dynan and Maki (2001) estimate that an additional dollar of wealth leads households with moderate securities holdings to increase consumption between 5 cents and 15 cents.…”

Wealth Effects and the Consumption of Italian Households in the Great Recession

“…To estimate this proportionality, or propensity to consume out of wealth, one might estimate the relationship between household consumption and household wealth in levels. An alternative, used, for example, by Dynan and Maki (2001) and Banks et al (2012), is to take differences and regress the change (first difference) 10 in household consumption on the change in household financial wealth:…”

“…Dynan and Maki (2001) deal with the issue by regressing the change in consumption on the "passive" part of the change in wealth, which is that part that comes from capital gains rather than from active consumption/saving decisions, and similarly Christelis, Georgarakos and Jappelli (2015) have data in which households are asked to report capital gains (or losses). The approach of Banks et al (2012) shares the idea of relating the change in consumption to a change in wealth that is not generated by active saving behaviour or portfolio adjustments, but uses this as the basis of an instrumental variables estimator.…”