Heterogeneous wealth effects (original) (raw)
Related papers
How Large is the Housing Wealth Effect? A New Approach
NBER working paper, 2006
This paper presents a simple new method for estimating the size of 'wealth effects' on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as 'habits' in the asset pricing literature) to distinguish between short-run and long-run 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 longrun effect around 9 cents. Consistent with most recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach has sounder theoretical foundations than the currently popular cointegration-based estimation methods, because neither theory nor evidence provides any reason for faith in the existence of a stable cointegrating vector.
Wealth Effects on Consumption: Microeconometric Estimates from a New Survey of Household Finances
Labor: Demographics & Economics of the Family, 2006
This paper presents estimates of wealth effects on consumer spending using the first wave of a new survey of household finances (EFF 2002) that contains direct measures of asset holdings and consumption. A distinguishing feature of the EFF is the availability of such information from a representative sample subject to stratification by wealth. Furthermore we believe we are able to measure wealth effects due to precautionary motives only. This is confirmed by the estimated pattern of wealth effects across age groups. To control for the potential endogeneity of housing wealth, we exploit geographical house price variation and inheritance information in the EFF as instrumental variables. We focus on the effects of housing wealth, distinguishing between main and secondary housing, but also report OLS estimates of financial wealth effects. We find large and statistically significant housing wealth effects for prime age households. Overall, the largest wealth effects are for owner occupie...
Consumption Responses to Permanent and Transitory Shocks to House Appreciation
SSRN Electronic Journal, 2000
We estimate the marginal propensity to consume (MPC) out of permanent and transitory shocks to house price appreciation. Besides borrowing constraints, we consider two different models under which those shocks may affect consumption. In the first one, we treat housing as a risky asset. In the second one, housing has a role as a consumption and as an investment good. In both, changes in the rate of house price appreciation may affect nonhousing consumption. Shocks to appreciation rates may happen when increases in future house prices are expected to differ from the current ones because heterogeneity, market failures or errors in expectations. We test the implications of those models empirically using the PSID's imputed total consumption from food consumption and self-reported house values, and base our identification strategy on two sources of variation in the appreciation rate. The first source depends on the fact that home prices are far more cyclical in areas where the supply of housing is relatively inelastic, causing the permanent and the transitory changes in appreciation rates to vary significantly by area. The second source is households' perceptions about which parts of shocks to appreciation rates are permanent or transitory. We model households' self-reported rate of appreciation as an AR(1) process and use both the Hodrick-Prescott and the Kalman filter to separate households' perceptions about permanent and transitory shocks to appreciation. Our results show that (1) consumption responses to house wealth shocks vary greatly by area and depend upon the area-specific levels of temporal persistence and variance of those shocks; (2) the overall MPC out of those shocks is 3.5%; (3) the MPC out of permanent shocks is between 3.4% and 9.1%; and (4) the MPC out of transitory shocks is between 0.5% and 3.3%.
Decomposing the Wealth Effect on Consumption
The Review of Economics and Statistics, 2016
We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining house prices. Deteriorating bank health leads to reduced credit supply both to households and firms. Our dataset allows us to estimate the effect of this on households as 20-25 percent of the consumption response. The remaining 35 percent is a general equilibrium effect that works via a decline in employment as a result of either lower credit supply to firms or the feedback from lower consumer demand. Our estimate of a negligible wealth effect is robust to accounting for the endogeneity of house prices and unemployment. The contribution of tightening household financial constraints goes down to 35 percent, whereas declining bank credit supply to households captures about half of the overall consumption response, once we account for endogeneity. JEL CLASSIFICATION: E32, O16.
Housing valuation, wealth perception, and households’ portfolio composition
2017
This paper empirically explores the relationship between wealth perception from homeownership and households’ preference towards asset categories pooled by risk. We aim to show that owning a residential property that faces an increase of its market value contributes to allocate wealth to other risk categories of assets within the same portfolio. We use household survey data from the Household Finance and Consumption Survey to obtain a measure of the rate of housing valuation to be used in regressions against shares of safe, medium risk, and risky assets from a single portfolio. Shares are treated as total wealth fraction and estimated with both fractional multinomial logit models and fractional logit models. Our findings indicate robust empirical evidence that perceived wealth from the rate of housing valuation matters to portfolio choices. The estimations predict that an increase in the rate of housing valuation increases the demand for risky assets of mixed type, together with neg...
Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe
IMF working paper, 2023
Households across Europe are struggling with a double crisis-the worst inflation shock since the World War II and a sudden correction in house prices. There is a rich literature on how housing price cycles affect consumer spending, finding mixed results with a wide range of consumption responses to changes in housing wealth. In this paper, using quarterly data on 20 countries in Europe over the period 1980-2023, we analyze the dynamic relationship between inflationadjusted housing wealth and consumer spending and obtain statistically significant and economically intuitive results. Household consumption responds positively and swiftly to changes in real house prices and gross disposable income as expected. Using the estimated coefficients, we can deduce that the average quarter-on-quarter decline of-1.96 percent in real house prices in the first quarter of 2023 in Europe could dampen consumer spending by about-0.51 percentage points in real terms on a cumulative basis over a horizon of eight quarters.
Housing Wealth and Consumption Expenditure
This memo considers the effect of housing wealth fluctuations on consumption expenditures. While empirical evidence from macroeconomic, regional, and microeconomic data varies, on balance most of the evidence seems consistent with a medium-run (after 3 years or so) housing wealth MPC in the neighborhood of 5-10 cents. The paper presents its own methodology for estimating the housing MPC, and concludes that the immediate (next-quarter) MPC from a change in housing wealth is around 1.5 cents, with a final long-run effect of about 9 cents. Finally, the paper estimates that the growth in housing wealth since 2000q1 left the level of aggregate consumption about 2.2 percentage points higher by 2003q3 than it would have been if housing wealth had been flat over the intervening period, possibly providing a partial explanation for the surprising strength of spending in the wake of the stock market declines over the last few years.
2018
Based on the seminal paper of Case, Quigley, and Shiller (2013), we investigated the effects of financial and housing wealth on consumption. Using quarterly data from 1975 to 2016 for all states of the U.S. economy, and a different methodology in measuring wealth, we report relatively greater financial effects than housing effects on consumption. Specifically, in our basic utilized model, the calculated elasticity for financial wealth was 0.060, while for housing it was 0.045. The results were not in agreement with the ones obtained by Case, Quigley, and Shiller. In an attempt to investigate this disparity, we proceeded by incorporating the introduction of the Tax Reform Act in 1986, which increased incentives for owner-occupied housing investments. Finally, due to distributional factors at work, and taking into account the pronounced uneven distribution of wealth, we investigated the effects of wealth for eight states that included the metropolitan areas comprising the well-known C...
2019
Based on the seminal paper of Case, Quigley and Shiller (2013), we investigate the effects of financial and housing wealth on consumption. Using quarterly data from 1975 to 2016, for all States of U.S. economy, and a different methodology in measuring wealth, we report relatively greater financial effects than housing effects on consumption. Specifically, in our basic utilized model, the calculated elasticity for financial wealth is 0.060, while for housing is 0.045. The results are not in agreement with the ones obtained by Case, Quigley and Shiller. In an attempt to investigate the disparity, we proceed by incorporating the introduction of the Tax Reform Act in 1986, which increased incentives for owneroccupied housing investments. Finally, due to distributional factors at work, and taking into account the pronounced uneven distribution of wealth we investigate the effects of wealth for 8 states that include the Metropolitan areas comprising of the well-known CaseShiller 10-City C...