Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth?

N Kundan Kishor ()

No 604, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: The strong consumption growth in a period of falling stock market and a moderate recession in the U.S. has sparked off a debate about the role of housing wealth as one of the determinants of consumption. The literature is divided over the issue whether the effect of change in the financial wealth on consumption is lower than the change in housing wealth. In this paper using Gonzalo-Ng (2001) variance decomposition framework we have shown that the net effect of housing wealth increase on consumption is higher than financial wealth. Using time varying parameter model we have also found that the housing wealth effect has increased overtime. This reflects the deregulation of the housing and mortgage market in US over the last three decades as the housing market has become more efficient.

Keywords: Consumption; Wealth Effect; Beverdige-Nelson Cycle; State Space Model; Kalman Filter; Cointegration (search for similar items in EconPapers)
JEL-codes: C22 E21 (search for similar items in EconPapers)
Date: 2004-08-11

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Persistent link: http://EconPapers.repec.org/RePEc:ecm:nasm04:604

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