Analyzing the Effects of Financial and Housing Wealth on Consumption Using Micro Data

Carlos Cáceres

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Financial Literacy, Pension, Retirement Analysis Housing Market and Economics Income, Poverty, and Inequality

Abstract

This paper analyzes the existence of “wealth effects” derived from net equity (in the form of housing, financial assets, and total net worth) on consumption. The study uses longitudinal household-level data?from the Panel Study of Income Dynamics (PSID) ?covering about 7,000-9,000 households in the U.S., with the estimations carried over the period 1999-2017. Overall, wealth effects are found to be relatively large and significant for housing wealth, but less so for other types of wealth, including stocks. Furthermore, the analysis shows how these estimated marginal propensities to consume (MPC) from wealth are closely linked to household characteristics, including income and demographic factors. Finally, underlying structural changes in household characteristics point to potentially lower aggregate MPCs from wealth going forward.

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References

1978Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence 2013Household Balance Sheets, Consumption, and the Economic Slump*2006How do house prices affect consumption? Evidence from micro data 1989Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence 2001Comparing Wealth Effects: The Stock Market Versus the Housing Market 2011How Large Are Housing and Financial Wealth Effects? A New Approach 2017Housing Wealth and Consumption: Evidence from Geographically Linked Microdata 2007Does wealth affect consumption? Evidence for Italy

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