Working Paper: NBER ID: w12746
Authors: Christopher D. Carroll; Misuzu Otsuka; Jirka Slacalek
Abstract: 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 long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegration- based estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector.
Keywords: housing wealth effect; marginal propensity to consume; aggregate consumption; wealth effects
JEL Codes: C22; E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| $1 increase in housing wealth (R21) | consumption growth (E20) |
| housing wealth (G51) | consumption growth (E20) |
| stock wealth (G12) | consumption growth (E20) |
| sluggish response of consumption growth to wealth shocks (E21) | MPC estimates (C13) |
| habit formation (I12) | sluggish response of consumption growth to wealth shocks (E21) |