Keywords: Consumption, saving, wealth effects
Abstract: This paper explores the household behavior that underlies the
link between wealth and consumption at the aggregate level.
One possibility is that changes in wealth directly cause changes
in consumption through their effect on households' contemporaneous
budget sets; another possibility is that they merely predict
changes in consumption because they signal changes in future
Based on analysis of household-level data from the Consumer
Expenditure Survey, we find that direct wealth effects begin to
up relatively quickly and continue to boost consumption growth for
a number of quarters, in line with aggregate estimates. In
we find that the indirect wealth channel is not an important
determinant of consumption growth. We also estimate that an
dollar of wealth leads households with moderate securities holdings
increase consumption between 5 cents and 15 cents, with the most
gain in the lower part of this range.
Full paper (202 KB PDF)
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Last update: May 15, 2001