How Large Is the Housing Wealth Effect? A New Approach

Christopher Carroll (), Misuzu Otsuka and Jiri (Jirka) Slacalek ()

No 12746, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C22 E21 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-mac and nep-ure
Date: Written
Note: AP EFG ME
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Working Paper: How Large Is the Housing Wealth Effect? A New Approach (2006)
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