Working Paper: CEPR ID: DP16338
Authors: Asger Lau Andersen; Niels Johannesen; Adam Sheridan
Abstract: How much and over what horizon do households adjust their consumption in response to stock market wealth shocks? We address these questions using granular data on spending and stock portfolios from a large bank and exploiting lottery-like variation in gains across investors with similar portfolio characteristics. Consistent with the permanent income hypothesis, spending responses to stock market gains are immediate and persistent. The responses cumulate to a marginal propensity to consume of around 4% over a one-year horizon. The estimates differ substantially by household liquidity, but not by financial attention, as measured by the frequency of account logins.
Keywords: wealth shocks; household consumption; marginal propensity to consume; permanent income hypothesis
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock market gains (G10) | household consumption (D10) |
| 1% gain in stock market wealth (G19) | spending increase of approximately 0.02 dollars (H59) |
| 1% gain in stock market wealth (G19) | spending increase of approximately 0.04 dollars over a one-year horizon (E62) |
| 1% gain in stock market wealth (G19) | spending increase of approximately 0.12 dollars over a three-year horizon (H69) |
| household liquidity (D14) | spending responses to stock market wealth shocks (E21) |
| financial attention (G50) | spending responses to stock market wealth shocks (E21) |