IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/131.html
   My bibliography  Save this paper

A primer on the economics and time series econometrics of wealth effects: a comment

Author

Abstract

In a recent paper (\\"A Primer on the Economics and Time Series Econometrics of Wealth Effects,\\" 2001), Davis and Palumbo investigate the empirical relation between three cointegrated variables: aggregate consumption, asset wealth, and labor income. Although cointegration implies that an equilibrium relation ties these variables together in the long run, the authors focus on the following structural question about the short-run dynamics: \\"How quickly does consumption adjust to changes in income and wealth? Is the adjustment rapid, occurring within a quarter, or more sluggish, taking place over many quarters?\\" The authors claim that their findings answer this question, and imply that spending adjusts only gradually after gains or losses in income or wealth have been realized. We argue here, however, that a statistical methodology different from that used by Davis and Palumbo is required to address these questions, and that once it has been employed, the resulting empirical evidence weighs considerably against their interpretation of the data.

Suggested Citation

  • Nathan Barczi & Martin Lettau & Sydney C. Ludvigson, 2001. "A primer on the economics and time series econometrics of wealth effects: a comment," Staff Reports 131, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:131
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr131.pdf
    Download Restriction: no
    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr131.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    2. Martin Lettau & Sydney Ludvigson, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, June.
    3. Sydney C. Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, vol. 5(Jul), pages 29-51.
    4. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-1273, November.
    5. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    6. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series 2001-09, Board of Governors of the Federal Reserve System (U.S.).
    7. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-1056, September.
    8. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
    2. Bruno Eugène & Philippe Jeanfils & Benoît Robert, 2003. "La consommation privée en Belgique," Working Paper Document 39, National Bank of Belgium.
    3. Andriy Avramenko & Michael R. Donihue, 2006. "Decomposing consumer wealth effects: evidence on the role of real estate assets following the wealth cycle of 1990-2002," Working Papers 06-15, Federal Reserve Bank of Boston.
    4. Nikola Dvornak & Marion Kohler, 2007. "Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia," The Economic Record, The Economic Society of Australia, vol. 83(261), pages 117-130, June.
    5. Lonnie Stevans, 2004. "Aggregate consumption spending, the stock market and asymmetric error correction," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 191-198.
    6. Fisher, Lance A. & Otto, Glenn & Voss, Graham M., 2010. "The response of Australian consumption to housing wealth," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 284-299, March.
    7. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
    8. Ludwig Alexander & Sløk Torsten, 2004. "The Relationship between Stock Prices, House Prices and Consumption in OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-28, March.
    9. Ludwig, Alexander & Sløk, Torsten, 2004. "The relationship between stock prices, house prices and consumption in OECD," Sonderforschungsbereich 504 Publications 04-12, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    10. Mr. Alexander Ludwig & Mr. Torsten M Sloek, 2002. "The Impact of Changes in Stock Prices and House Priceson Consumption in OECD Countries," IMF Working Papers 2002/001, International Monetary Fund.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
    2. Andriy Avramenko & Michael R. Donihue, 2006. "Decomposing consumer wealth effects: evidence on the role of real estate assets following the wealth cycle of 1990-2002," Working Papers 06-15, Federal Reserve Bank of Boston.
    3. Monica Paiella, 2009. "The Stock Market, Housing And Consumer Spending: A Survey Of The Evidence On Wealth Effects," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 947-973, December.
    4. Sousa, Ricardo M., 2009. "Wealth effects on consumption: evidence from the euro area," Working Paper Series 1050, European Central Bank.
    5. Ludwig Alexander & Sløk Torsten, 2004. "The Relationship between Stock Prices, House Prices and Consumption in OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-28, March.
    6. Committee, Nobel Prize, 2003. "Time-series Econometrics: Cointegration and Autoregressive Conditional Heteroskedasticity," Nobel Prize in Economics documents 2003-1, Nobel Prize Committee.
    7. Ludwig, Alexander & Sløk, Torsten, 2004. "The relationship between stock prices, house prices and consumption in OECD," Sonderforschungsbereich 504 Publications 04-12, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    8. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    9. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
    10. Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, June.
    11. Gabriel Vasco J. & Alexandre Fernando & Bação Pedro, 2008. "The Consumption-Wealth Ratio under Asymmetric Adjustment," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(4), pages 1-32, December.
    12. André Kallåk Anundsen & Ragnar Nymoen, 2015. "Did US Consumers 'Save for a Rainy Day' Before the Great Recession?," CESifo Working Paper Series 5347, CESifo.
    13. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    14. Martin Lettau & Sydney Ludvigson, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, June.
    15. Ericsson, Neil R., 1992. "Cointegration, exogeneity, and policy analysis: An overview," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 251-280, June.
    16. Luis Miguel Pacheco & Jose Martins Barata, 2005. "Residential and Stock Market Effects on Consumption across Europe," International Journal of Housing Policy, Taylor & Francis Journals, vol. 5(3), pages 255-278.
    17. Uwe Hassler & Jürgen Wolters, 2006. "Autoregressive distributed lag models and cointegration," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 90(1), pages 59-74, March.
    18. Vassilis Polimenis & Ioannis Neokosmidis, 2019. "Non-stationary dividend-price ratios," Journal of Asset Management, Palgrave Macmillan, vol. 20(7), pages 552-567, December.
    19. Hecq, A.W. & Issler, J.V., 2012. "A common-feature approach for testing present-value restrictions with financial data," Research Memorandum 006, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    20. Benoît Mercereau, 2003. "The Role of Stock Markets in Current Account Dynamics: Evidence from the United States," IMF Working Papers 2003/108, International Monetary Fund.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:131. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.