Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/72036
Authors: 
Carroll, Christopher D.
Otsuka, Misuzu
Slacalek, Jirka
Year of Publication: 
2006
Series/Report no.: 
Working Papers, The Johns Hopkins University, Department of Economics 535
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 longrun effect around 9 cents. Consistent with most recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach has sounder theoretical foundations than the currently popular cointegration-based estimation methods, because neither theory nor evidence provides any reason for faith in the existence of a stable cointegrating vector.
Subjects: 
Housing Wealth
Wealth Effect
Consumption Dynamics
Asset Prices
JEL: 
E21
E32
C22
Document Type: 
Working Paper

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