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Wealth effect in the US: evidence from brand new micro-data

Salotti, Simone (2009): Wealth effect in the US: evidence from brand new micro-data.

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Abstract

This article investigates how wealth and capital gains affected household consumption in the USA in the period 1989-2004. The empirical evidence brought so far by a large literature that investigates the role of wealth shocks on consumption is mixed, due to the low quality of the data more readily available. We use a statistical matching procedure to create our own unique dataset, merging data from the Consumer Expenditure Survey and the Survey of Consumer Finances. The high quality data that result from this operation allow us to perform a detailed analysis on the mechanism of the wealth effect. We divide between durables and non durables consumption, and we also investigate the roles of the different components of household wealth, both gross and net. Our estimates indicate that there is a significant tangible wealth effect, and its economic importance lies in the low range of the estimates of the previous empirical literature. Decomposing tangible wealth in the house of residence and other real estate leads us to conclude that both contribute to the total wealth effect, but the former is quantitatively more important. On the contrary, financial wealth seems to have no significant effects on consumption. This last finding tends to confirm the evidence found in a number of previous studies that use both micro and macro-level data. Interestingly, the effects of tangible wealth on consumption disappears in 2004, maybe because US households perceived that the rising property prices due to the housing bubble were not permanent, thus they did not modify savings. The estimation of the model with a Pooled OLS on the repeated cross sections confirms the initial findings, and, allowing for some interaction terms, permits a better understanding of the role played by aged people. The importance of tangible wealth is confirmed by this final estimation.

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