Time-Varying Effects of Housing and Stock Returns on U.S. Consumption

Abstract

Abstract. This paper applies a time-varying parameter vector autoregressive approach to estimate the relative effects of housing and stock returns on the growth rate of US consumption over time. We use annual data from 1890 to 2012 and find that at the one-and two-year horizons and over time, generally the housing return positively affects consumption growth while the stock return negatively affects it. For the three-to six-year horizons, the two return shocks generally exert a negative, but small, effect on consumption growth. These opposite responses to changes in housing and stock returns suggest different mechanisms through which wealth affects consumption. Further, the housing return effect generally increases after 1980. The sub-period from 1980 to 2012 includes the 1997/2002 asset price boom/bust where house prices continued to rise moderately as stock prices fell. These findings suggest that the magnitude of the relative return effects differs with both time and horizons and also depends on whether prices increase or decrease.

New Evidence on Housing Wealth and Consumption Channels

“…Wealthier households-those with a potentially greater percentage of net worth in 1 For example, see Belsky and Prakken (2004); Kishor (2007); Case et al (2008); Benjamin and Chinloy (2008); Bostic et al (2009);Tsai et al (2012); Abdallah and Lastrapes (2013); Guo and Hardin (2014); and others. 2 For example, see Kishor (2007); Simo-Kengne et al (2015); and Bostic et al (2009). financial assets-are less likely to finance consumption through loans using housing as collateral.…”

Time-varying role of macroeconomic shocks on house prices in the US and UK: evidence from over 150 years of data

“…A number of studies emphasize the role of asset price fluctuations, especially house prices, in driving financial and business cycle dynamics (Leamer, 2007;Miller et al, 2011;Balcilar et al, 2014;Nyakabawo et al, 2015;Emirmahmutoglu et al, 2016). Asset price variations affect the real economy as a consequence of the direct effect of households' wealth on consumption (e.g., Iacoviello and Neri, 2010;André et al, 2012;Iacoviello, 2012;Zhou and Carroll, 2012;Case et al 2013;Liu et al, 2013;Guerrieri and Iacoviello, 2013;Mian et al, 2013;Simo-Kengne et al, 2015). The housing construction sector represents a large part of the total economic activity and consequently reflects a large portion of the total wealth of the economy (Case and Shiller, 2003).…”

“…More specifically, we examine the response of real house prices to shocks on real output, price level and monetary policy variables, and use the conditional and unconditional evolution of volatility and correlation to uncover possible trends in the housing sector. Instead of assuming exogenous/fixed number of regimes over the entire sample period, as in a Markov-switching model, using the time-varying approach, we consider each point in time as a regime with the transition across them taking place in a smooth rather than abrupt fashion-something we would expect in low frequency (annual) data as in Simo-Kengne (2015, 2016.…”

Has the correlation of inflation and stock prices changed in the United States over the last two centuries?

“…At the same time, real stock price movements can affect the inflation rate through the wealtheffect, i.e., via its impact on consumption and hence aggregate demand. Ludwig and Sløk (2004), and more recently Simo-Kengne et al, (2015), discusses four different channels of influence for stock prices on consumption: First, the realised wealth effect implies that an increase in stock prices exerts a direct positive effect on stockholders' consumption as a consequence of the realised gain. Second, the unrealised wealth effect refers to the increase in consumption spending based on the expectation that raising the current stock price will result in higher future income and wealth.…”