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The consumption-wealth ratio and asset returns: The Euro Area, the UK and the US

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Abstract

In this paper, I assess the forecasting power of the residuals of the trend relationship among consumption, aggregate wealth, and labour income for stock returns and government bond yields in the euro area, the UK and the US . I find that when stock returns are expected to be higher in the future, forward-looking investors will temporarily allow consumption to rise. As for bond returns, when government bonds are seen as a component of asset wealth, then investors react in the same manner. If, however, investors perceive the increase in bond returns as signalling a future rise in taxes or a deterioration of public finances, then they will let consumption fall temporarily below its equilibrium level.

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  • Ricardo M. Sousa, 2010. "The consumption-wealth ratio and asset returns: The Euro Area, the UK and the US," NIPE Working Papers 9/2010, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:9/2010
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    Cited by:

    1. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel A. Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working Papers 201228, University of Pretoria, Department of Economics.
    2. Castro, Vítor & Sousa, Ricardo M., 2012. "How do central banks react to wealth composition and asset prices?," Economic Modelling, Elsevier, vol. 29(3), pages 641-653.
    3. Luca Agnello & Ricardo M. Sousa, 2013. "Fiscal Policy And Asset Prices," Bulletin of Economic Research, Wiley Blackwell, vol. 65(2), pages 154-177, April.
    4. Afonso, António & Sousa, Ricardo M., 2011. "What are the effects of fiscal policy on asset markets?," Economic Modelling, Elsevier, vol. 28(4), pages 1871-1890, July.

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    More about this item

    Keywords

    consumption; wealth; stock returns; bond returns.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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