Working Paper: CEPR ID: DP13856
Authors: Gabriel Chodorow-Reich; Plamen T. Nenov; Alp Simsek
Abstract: We provide evidence of the stock market wealth effect on consumption by using a local labor market analysis and regional heterogeneity in stock market wealth. An increase in local stock wealth driven by aggregate stock prices increases local employment and payroll in nontradable industries and in total, while having no effect on employment in tradable industries. In a model with consumption wealth effects and geographic heterogeneity, these responses imply a marginal propensity to consume out of a dollar of stock wealth of 3.2 cents per year. We also use the model to quantify the aggregate effects of a stock market wealth shock when monetary policy is passive. A 20% increase in stock valuations, unless countered by monetary policy, increases the aggregate labor bill by at least 1.7% and aggregate hours by at least 0.75% two years after the shock.
Keywords: stock prices; consumption; wealth effect; marginal propensity to consume; employment; wages; regional heterogeneity; time-varying risk premium; nominal rigidities; monetary policy
JEL Codes: E44; E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in local stock wealth driven by aggregate stock prices (G19) | increase in local employment in nontradable industries (J69) |
| increase in local stock wealth driven by aggregate stock prices (G19) | increase in payroll in nontradable industries (J39) |
| 20% increase in stock valuations (G19) | raise the aggregate labor bill by at least 17% (J39) |
| 20% increase in stock valuations (G19) | increase aggregate hours by at least 0.75% (J38) |
| increase in local stock wealth driven by aggregate stock prices (G19) | increase in local consumption (D19) |