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Wealth Effects In Consumption: The Financial Accelerator And Banks’ Willingness To Lend

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  • Jakob B Madsen
  • Hui Yao

Abstract

Empirical estimates point towards wealth effects in consumption that are significantly higher than predicted by economic theory. This paper argues that the wealth effects are partly or fully driven by an unobserved macroeconomic factor such as credit conditions because asset prices affect the collateral of borrowers as well as lenders. Using an instrumental variable approach it is shown that asset prices affect durable and non-durable consumption through banks’ willingness to lend and not through the traditional wealth effect channel.

Suggested Citation

  • Jakob B Madsen & Hui Yao, 2012. "Wealth Effects In Consumption: The Financial Accelerator And Banks’ Willingness To Lend," Monash Economics Working Papers 56-12, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2012-56
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2012/5612wealtheffectsmadsenyao.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    wealth effects; credit constraints; consumption.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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