WEALTH EFFECTS IN CONSUMPTION: THE FINANCIAL ACCELERATOR AND BANKS’ WILLINGNESS TO LEND

Jakob Madsen and Hui Yao

No 56-12, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: Empirical estimates point towards wealth effects in consumption that are significantly higher than predicted by economic theory. This paper argues that the wealth effects are partly or fully driven by an unobserved macroeconomic factor such as credit conditions because asset prices affect the collateral of borrowers as well as lenders. Using an instrumental variable approach it is shown that asset prices affect durable and non-durable consumption through banks’ willingness to lend and not through the traditional wealth effect channel.

Keywords: wealth effects; credit constraints; consumption. (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2012-09
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