A Reexamination of the Wealth Effect and Uncertainty Effect

Ling He and Joseph McGarrity

International Advances in Economic Research, 2005, vol. 11, issue 4, 379-398

Abstract: In an influential article, [Romer, C. “The Great Crash and the Onset of the Great Depression,” Quarterly Journal of Economics, 105, 1990, pp. 597–624.] estimates the magnitudes of the uncertainty and wealth effects. She reports that before and after the Great Depression, the uncertainty effect has a large and statistically significant influence on durable good production, while the wealth effect is negative but negligible. When the authors of this paper change the specification of the model with respect to the amount of time necessary for stock returns to translate into changes in consumption, they reach the exact opposite conclusions that Romer does. Specifically, when the authors allow consumers 12 or more months to alter consumption behavior, rather than Romer's three, stock price uncertainty did not significantly affect the durable goods production before, during, or after the Great Depression. The authors also find that stock market returns from the previous year have a positive and statistically significant impact on the durable goods production, indicating the importance of the wealth effect. Copyright International Atlantic Economic Society 2005

Keywords: D10 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11294-005-2276-6

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