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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 the literature is unclear, likely because of the low quality of the data more readily available. We combine information from the Consumer Expenditure Survey and the Survey of Consumer Finances to perform a detailed analysis on the effects of wealth on consumption. 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 cross-section 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. On the contrary, financial wealth seems to have no significant effects on consumption, apart from a low positive effect during the Nineties. The estimation of the model with a Pooled OLS on the repeated cross sections confirms these initial findings. Interesting features arise from the estimation of the model dividing the sample by income quartiles, such as a decreasing wealth effect as income rises. Overall, our results demonstrate that the fears of sizable reverse direct wealth effects due to sudden declines in housing values has been overstated in previous studies.

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