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Housing and stock market wealth effects in developing economies

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  • Bhupal Singh

    (International Monetary Fund)

Abstract

While there has been a copious emphasis on wealth effects in macroeconomic analysis in advanced economies, it has remained an underexplored subject for developing economies. This paper specifically examines the existence of stock and housing wealth effects in developing countries. Further, it examines the related question of how differently the consumption responds to changes in a specific type of wealth, and to what extent the degree of financial deepening alters the intensity of wealth effect. Empirical inquiry, using panel data of 20 large emerging market and developing countries over the period 1996:Q1 to 2019:Q4, reveals a strong housing wealth effect, which could be attributed to dispersed ownership and households’ belief in the durability of wealth gains. In contrast, there is a lack of ample evidence of any significant positive stock market wealth effect, rather we find the presence of a somewhat small negative stock wealth effect, which could be associated with skewed holdings of stock wealth and uncertainty in wealth gains. However, finding from the sample of countries characterized by a higher degree of financial deepening, reveals that the stock market wealth effect turns positive and significant when the financial sector crosses a threshold of development. Besides, the housing wealth effect turns stronger with greater financial deepening and dominates the stock market wealth effect. Thus, as developing countries attain higher financial development, the wealth effect channel may turn prominent in influencing business cycle behaviour, macroeconomic aggregates and policy responses.

Suggested Citation

  • Bhupal Singh, 2022. "Housing and stock market wealth effects in developing economies," International Economics and Economic Policy, Springer, vol. 19(1), pages 29-49, February.
    • Handle: RePEc:kap:iecepo:v:19:y:2022:i:1:d:10.1007_s10368-021-00510-9
    DOI: 10.1007/s10368-021-00510-9
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    Cited by:

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    2. Zhao, Mengxue & Yuan, Zhihang & Chan, Hon S., 2023. "Housing wealth and household carbon emissions: The role of homeownership in China," Ecological Economics, Elsevier, vol. 212(C).
    3. Tianbao Zhou & Zhixin Liu & Yingying Xu, 2024. "Characterizing Public Debt Cycles: Don't Ignore the Impact of Financial Cycles," Papers 2404.17412, arXiv.org.

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    More about this item

    Keywords

    Wealth effect; Household consumption; Life cycle models; Developing countries;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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