Wealth Accumulation and Household Consumption by Type: U.S.Experience

What the paper says

This paper empirically examines the effect of various types of wealth on household consumption by type in the United States during period of 1990 to 2004. The basic analytical framework is the lifecycle permanent income hypothesis, though some other factors are also considered. The estimation results indicate that financial wealth is the most important component of wealth that stimulates consumption, especially in regard to durable goods. On the other hand, various types of cash extraction derived from housing assets are not always connected directly to consumption; instead, it is very likely that these extractions are tied to further accumulation of housing assets and financial wealth. The conclusion is that the effect of housing stock on consumption is not as prevalent as many economists believe, and the collateral of housing stock may have produced a warped flow of funds in the U.S. household sector. The remarkable rise in stock and housing prices during the recent economic expansion in the U.S. has led to research interest in the effects and mechanisms of wealth on consumption spending. From the perspective of the theoretical background of consumption, the life-cycle permanent income hypothesis is one of the most sophisticated theories. This paper explores the U.S. household behavior that underlies the link between wealth and consumption. Here, there are three distinct analytical differences with earlier works. First, this work examines the effects of household wealth on consumption by taking the composition of wealth into consideration. The main focus of this hypothesis is that the total wealth is the key factor that affects household consumption, which is decided over one’s lifetime. This characteristic implies that various types of wealth, such as equity, non-equity financial wealth, residential wealth, and other wealth should have effects of the same magnitude on consumption. Clearly, such an extreme effect is unrealistic and it is natural that different types of wealth have different effects on consumption. For example, in mid 2000, the financial wealth held by households fell dramatically due to the sudden drop in the U.S. stock market. In spite of worries that consumption would decrease due to the anti-wealth effect, consumption had held remarkably firm. Case, Quigley and Shiller (2001) rely on a panel of 14 countries and a panel of U.S. states. They distinguished the effects of financial and housing wealth on consumption and found a statistically significant and rather strong effect of housing wealth on household consumption. Boone et al. (1998) and, Ludvigson and Steindel (1999) also conducted recent studies on consumption in the U.S. in which they differentiate between stock market wealth and non-stock market wealth. Although these studies provided interesting