Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth? If So, Why?

Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth? If So, Why? This paper uses long-run equilibrium relationship between consumption and different components of wealth to estimate the effect of changes in housing wealth and financial wealth on consumption. By exploiting this long-run property, it has been shown that a dollar increase in housing wealth increases consumption by seven cents, whereas, a corresponding dollar increase in financial wealth increases consumption by only three cents. This difference in the wealth effect arises because transitory shocks dominate variation in financial wealth, whereas permanent shocks account for most of the variation in housing wealth. This paper also shows that the relative importance of permanent component for housing wealth has witnessed an increase over the last thirty years. Therefore, housing wealth effect has also increased over time. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth? If So, Why?

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Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-007-9080-4
Publisher site
See Article on Publisher Site

Abstract

This paper uses long-run equilibrium relationship between consumption and different components of wealth to estimate the effect of changes in housing wealth and financial wealth on consumption. By exploiting this long-run property, it has been shown that a dollar increase in housing wealth increases consumption by seven cents, whereas, a corresponding dollar increase in financial wealth increases consumption by only three cents. This difference in the wealth effect arises because transitory shocks dominate variation in financial wealth, whereas permanent shocks account for most of the variation in housing wealth. This paper also shows that the relative importance of permanent component for housing wealth has witnessed an increase over the last thirty years. Therefore, housing wealth effect has also increased over time.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Sep 9, 2007

References

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