Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25501
Authors: 
Carroll, Christopher D.
Otsuka, Misuzu
Slacalek, Jirka
Year of Publication: 
2006
Series/Report no.: 
CFS Working Paper 2006/35
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 cointegrationbased estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector.
Subjects: 
Housing Wealth
Wealth Effect
Consumption Dynamics
Asset Price Bubbles
JEL: 
E21
E32
C22
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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