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An appraisal of the wealth effect in the US: evidence from pseudo-panel data

Salotti, Simone (2010): An appraisal of the wealth effect in the US: evidence from pseudo-panel data.

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How does household wealth influence consumption? The empirical evidence brought so far by the literature is unclear, mostly because of the low quality of the data more readily available: aggregate data, cross sections and panel datasets lacking important variables all present major shortcomings for a proper analysis of the wealth effect. The aim of our paper is to contribute to the appraisal of the wealth effect performing a pseudo-panel analysis for the USA (1989-2007), combining information from the Consumer Expenditure Survey and the Survey of Consumer Finances. We distinguish between total 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 (between 2 and 4 cents per dollar), with an overwhelming importance of the value of the house of residence. On the contrary, financial wealth seems to positively affect consumption of the older households only. In general, it seems that older households experience higher wealth effects, i.e., extract more liquidity from their assets, than younger ones, which rely more on income effects.

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