The Effect of Wealth on Consumption Expenditures: Cross Country and Cross Socio-Demographic Group Comparisons
This study is a contribution to literature on the impact of wealth on consumption (the wealth effect). We assess within- and between-country differences in the housing and financial wealth effect and analyze these differences according to socio-demographic characteristics. Our interest in separating the wealth effect into two is motivated by increases in housing prices in many industrialized countries. The fact that many developed countries are undergoing demographic changes prompted us to consider the relationship between socio-demographic characteristics and wealth effects. Differences are found in the magnitudes of financial and housing wealth effects by age, gender, as well as family composition of the households in all three countries. This paper reports some of the first findings based on data from a new source, the Luxembourg Wealth Study (LWS), built within the larger Luxembourg Income Study (LIS). LWS is a database containing harmonized wealth micro-datasets from a number of industrialized countries. In our analysis we use data from three countries: Canada, Finland and Italy. (original abstract)
- Aguiar, M. and E. Hurst 2006. "Consumption vs. Expenditure." Journal of Political Economy, (forthcoming).
- Ando, A. and F. Modigliani. 1963. "The Life-Cycle Hypothesis of Saving: Aggregate Implications and Tests." American Economic Review, 53(1), p. 55-84.
- Attanasio, Orazio. 1998. "Consumption Demand." NBER Working Paper 6466.
- Banks, J. and R. Blundell, S. Tanner, Sarah Battistin. 1998. "Is there a Retirement-Savings Puzzle?" American Economic Review 88(4), 769-788.
- Barro, Robert J. 1974. "Are Government Bonds Net Wealth?" Journal of Political Economy, 82(6), 1095-1117.
- Battisitin, E. and A. Brugiavini, E. Rettore, G. Weber. 2005. "How Large is the Retirement Consumption Drop in Italy?" Unpublished manuscript.
- Belsky, Eric and J. Prakken. 2004. "Housing's Impact on Wealth Accumulation,Wealth Distribution and Consumer Spending." Joint Center for Housing Studies Working Paper W04-13. http://www.jchs.harvard.edu/publications/finance/w04-13.pdf
- Blanchard, O. and S. Fisher. 1989. "Lectures on Macroeconomics." MIT Press, Cambridge, Massachusetts.
- Boone, Laurence and N. Girouard. 2002. "The Stock Market, the Housing Market and Consumer Behavior." OECD Economic Studies, No. 35, 2002/2.
- Bover, O. 2005. "Wealth Effects on Consumption: Microeconometric Estimates from the Spanish Survey of Household Finances," Documentos de Trabajo, No. 0522, Banco de Espana, Spain.
- Brumberg, Richard and Franco Modigliani. 1954. "Utility analysis and the consumption function: An interpretation of cross-section data." In: Kurihara, K.K (ed.):Post-Keynesian Economics.
- Bucks, B. and K. Pence. 2005. "Measuring Housing Wealth," paper prepared for LWS Workshop: "Construction and Usage of Comparable Microdata on Wealth: the LWS," Perugia, Italy, 27-29 January 2005.
- Buhmann, B., L. Rainwater, G. Schmaus and T. Smeeding. 1988. "Equivalence scales, well-being, inequality, and poverty: sensitivity of estimates across ten countries using the Luxembourg Income Study (LIS) database," Review of Income and Wealth, 34 (2), 115-142.
- Bostic, R., S. Garbriel, and G. Painter. 2005. "Housing Wealth, Financial Wealth and Consumption: New Evidence from Micro Data." The Lusk Center for Real Estate Working Paper 2004-1005. http://www.usc.edu/schools/sppd/lusk/research/pdf/wp_2004-1005.pdf
- Campbell, J. Y. and J. F. Cocco. 2005. "How do House Prices Affect Consumption? Evidence from Micro data." NBER Working Paper 11534.
- Carroll, C. 2004. "Housing Wealth and Consumption Expenditure." Unpublished manuscript, Johns Hopkins University.
- Case, K., J. Quigley, R. Shiller. 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market." Advances in Macroeconomics: Vol. 15: no. 1, article 1. http://www.bepress.com/cgi/viewcontent.cgi?article=1235&context=bejm.
- Davis, M., and M. Palumbo. 2001. "A Primer on the Economics and Time Series Econometrics of Wealth Effects." Federal Reserve Board. Finance and Economics Discussion Paper No. 2001-09.
- de Leeuw, F. and E. Gramlich. 1969. "The Channels of Monetary Policy." Federal Reserve Bulletin 55, p. 472-491.
- Disney, R., A. Henley, and D. Jevons. 2003. "House Price Shocks, Negative Equity and Household Consumption in the U.K." Mimeo, University of Nottingham.
- Dolmas, J. 2003. "A Note on the Potential Pitfalls in Estimating a 'Wealth Effect' on Consumption from Aggregate Data." Economic Letters, 78(3), p. 437-44.
- Dvornak, N., and M. Kohler. 2003. "Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia." Reserve Bank of Australia, Research Discussion Paper 2003-07.
- Dynan, K.E., J. Skinner and S. P. Zeldes 2000. "Do the Rich Save More?" NBER Working Paper No. 7906
- Friedman, Milton. 1957. "A Theory of the Consumption Function." Princeton University Press, Princeton.
- Gramlich, Edward. 2002. "Consumption and the Wealth Effect: The United States and the United Kingdom." Speech Before the International Bond Congress, London, U.K. February 20, 2002. http://www.federalreserve.gov/boarddocs/speeches/2002/20020220/default.htm
- Grant, C. and T. Peltonen 2005. "Housing and Equity Wealth Effects of Italian Households." DNB Working Paper No.43.
- Guiso, L., M. Paiella and I. Visco 2005. "Do capital gains affect consumption? Estimates of wealth effects from italian households' behavior" Temi di discussione No. 555 June 2005
- Hoynes, H., and D. McFadden. 1994. "The Impact of Demographics on Housing and Non-Housing Wealth in the United States." NBER Working Paper 4666.
- Hurd, M., and S. Rohwedder. 2005. "Changes in Consumption and Activities at Retirement." DNB Working Paper No. 39.
- Lehnert, A. 2004. "Housing, Consumption, and Credit Constraints." Federal Reserve Board Working Paper No. 2004-63.
- Letteau, M., and S. Ludwigson. 2003. "Understanding Trend and Cycle in Assets Values: Reevaluating the Wealth Effect on Consumption." NBER Working Paper 9848.
- Ludvigson, S., C. Steindel and M. Lettau. 2002. "Monetary Policy Transmission through the Consumption-Wealth Channel." Economic Policy Review, Volume 8, Number 1.
- Ludwig, A. and T. Slok. 2004. "The Relationship Between Stock Prices, House Prices, and Consumption in OECD Countries." Berkeley Electronic Press, vol. 4(1), pages 1114-1114.
- Luxembourg Wealth Study. 2005. Information available at http://www.lisproject.org/lws.htm.
- Maki, D. and M. Palumbo. 2001. "Disentangling the Wealth Effect: A Cohort Analysis of Household Saving in the 1990s." Federal Reserve Board.
- Mehra, Y. 2001. "The Wealth Effect in Empirical Life-Cycle Aggregate Consumption Equations." Federal Reserve Bank of Richmond Economic Quarterly 87 (2), 45-68.
- Modigliani, F. 1971. "Consumer Spending and Monetary Policy: The Linkages." Federal Bank of Boston Conference Series 5.
- Niskanen, E. 2006. "The Luxembourg Wealth Study: Technical Report on Income Variables," unpublished manuscript July 2006.
- Nothaft, Frank. 2004. "The Contribution of Home Value Appreciation to US Economy Growth." Urban Policy and Research, Volume 22, No. 2, 23-34.
- Pearson, M. and T. Smeeding. 2005. "Tax Treatment and Institutional Details for Wealth Holding and Wealth Transfer," paper prepared for LWS Workshop: "Construction and Usage of Comparable Microdata on Wealth: the LWS," Perugia, Italy, 27-29 January 2005.
- Pichette, L., and D. Tremblay. 2003. "Are Wealth Effects Important for Canada." Bank of Canada Working Paper 2003-30.
- Poterba J., and A. Samwick. 1995. "Stock Ownership Patterns, Stock Market Fluctuations and Consumption." Brookings Papers on Economic Activity, 2, 295-372.
- Romer, C. 1990. "The Great Crash and the Onset of the Great Depression." Quarterly Journal of Economics 105, 597-624.
- Shefrin, H. and R. Thaler. 1988. "The behavioral life-cycle hypothesis." Economic Inquiry, 26, 609-643.
- Sierminska, E. 2005. "The Luxembourg Wealth Study: A Progress Report," paper prepared for LWS Workshop: "Construction and Usage of Comparable Microdata on Wealth: the LWS," Perugia, Italy, 27-29 January 2005.
- Sierminska, E. and T. Smeeding 2005. "Measurement Issues: Equivalence Scales, Accounting Framework and Reference Unit", paper prepared for LWS Workshop: "Construction and Usage of Comparable Microdata on Wealth: the LWS," Perugia, Italy, 27-29 January 2005.
- Sierminska, E., Brandolini, A. and T. Smeeding 2006a. "First results from a comparable cross-national wealth study: the Luxembourg Wealth Study" Luxembourg Wealth Study Working Paper No. 1, August 2006.
- Sierminska, E., Brandolini, A. and T. Smeeding 2006b. "The Luxembourg Wealth Study-A cross-country comparable database for household wealth research" Journal of Economic Inequality, 4(3): 375-383, 2006.
- Sierminska, E. and Y. Takhtamanova 2007 "Disentangling the Wealth Effect: Some International Evidence" FRBSF Economic Letter, 2007-02; January 19, 2007. http://www.frbsf.org/publications/economics/letter/2007/el2007-02.html
- Sierminska, E., and Y. Takhtamanova. 2007. "Wealth Effect out of Financial and Housing Wealth: Cross-Country and Age Group Comparisons." FRBSF Working Paper, forthcoming.
- Thaler, R. 1990. "Anomalies: Saving, fungability, and mental accounts." Journal of Economic Perspectives, 4: 193-206, 1990.
- Venti, S., and D. Wise. 2001. "Aging and Housing Equity: Another Look."NBER Working Paper 8608.