Equity Prices, Household Wealth, and Consumption Growth in Foreign Industrial Countries: Wealth Effects in the 1990s

Abstract

Although most recent empirical research regarding the size and significance of the impact of changes in wealth on consumption has looked for such effects in the United States, equity prices in the 1990s rose considerably in most other industrial countries as well. This paper investigates the strength of the wealth effect across countries. Using a variety of methods, I find evidence of significant wealth effects in the United Kingdom and Canada of a size comparable to that in the United States, reflecting the importance of equities in aggregate household wealth in these countries. A significant wealth effect is also evident in Japan, but because household wealth has changed little on balance in Japan in recent years, this channel has been less important in explaining Japanese consumption growth in the second half of the 1990s. Despite a rapid appreciation in equity prices and an increase in equity ownership in the major continental European countries since 1995, equities remain a less important form of household wealth in most of these countries, and the consumption response to changes in wealth remains limited. However, in some smaller European countries where equity issuance is more common, the emerging evidence suggests that wealth effects may be more important.

US share prices and real supply and demand shocks

“…5 Thus even if a 10% increase in output also increased current and expected future profits and dividends by 10%, left the discount rate unaltered so that share prices rose by 10%, the wealth effect on consumption is likely to increase consumption and therefore aggregate demand by less that 2%; see Bertaut (2002) for calculations of the size of this effect for a variety of countries under various assumptions.…”

Wealth effects in emerging market economies

“…The empirical model for the estimation of wealth e¤ects on consumption can be summarized as follows 7 :…”

What Drives Personal Consumption? The Role of Housing and Financial Wealth

“…Cross-country comparative work includes Bertaut (2002), Ludwig and Sløk (2004), Catte et al (2004), Case et al (2005) and Labhard et al (2005). The implications of these papers are constrained by data limitations, which I try to alleviate.…”

“…The implications of these papers are constrained by data limitations, which I try to alleviate. In particular, the above papers do not investigate housing wealth effect (Bertaut, 2002 andLabhard et al, 2005), use annual data (Case et al, 2005 andin part Catte et al, 2004), relatively few countries (Bertaut, 2002;Catte et al, 2004 andCardarelli et al, 2008) or proxy wealth variables with stock and real estate prices (Ludwig andSløk, 2004 andCardarelli et al, 2008).…”