Does Stock Market Wealth Matter for Consumption?

44 Pages Posted: 16 May 2001

See all articles by Karen E. Dynan

Karen E. Dynan

Harvard University; Peterson Institute for International Economics

Dean M. Maki

Putnam Investments - Macroeconomic Research

Date Written: May 2001

Abstract

This paper explores the household behavior that underlies the link between wealth and consumption at the aggregate level. One possibility is that changes in wealth directly cause changes in consumption through their effect on households? contemporaneous budget sets; another possibility is that they merely predict changes in consumption because they signal changes in future income. Previous attempts to assess the relative importance of these "direct" and "indirect" channels have yielded indeterminate results. Based on analysis of household-level data from the Consumer Expenditure Survey, we find that direct wealth effects begin to show up relatively quickly and continue to boost consumption growth for a number of quarters, in line with aggregate estimates. In contrast, we find that the indirect wealth channel is not an important determinant of consumption growth. We also estimate that an additional dollar of wealth leads households with moderate securities holdings to increase consumption between 5 cents and 15 cents, with the most likely gain in the lower part of this range.

Suggested Citation

Dynan, Karen E. and Maki, Dean, Does Stock Market Wealth Matter for Consumption? (May 2001). Available at SSRN: https://ssrn.com/abstract=270190 or http://dx.doi.org/10.2139/ssrn.270190

Karen E. Dynan (Contact Author)

Harvard University ( email )

Littauer Center
Cambridge, MA 02138
United States

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://https://piie.com/experts/senior-research-staff/karen-dynan

Dean Maki

Putnam Investments - Macroeconomic Research ( email )

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