The Wealth Effect and Consumption

According to research by Karl E. Case, John M. Quigley and Robert J. Shiller, Alan Greenspan’s much promoted wealth effect derived from equity market appreciation may be insignificant. Instead, they identify housing appreciation as a more reliable driver for consumption. If this is true, it’s unfortunate for those in the Fed hoping asset price inflation will lead to real economic growth:

We have examined the wealth effect with a cross-sectional time-series data sets that are more comprehensive than any applied to the wealth effect before and with a number of different econometric specifications.The statistical results are variable depending on econometric specification, and so any conclusion must be tentative.Nevertheless, the evidence of a stock market wealth effect is weak; the common presumption that there is strong evidence for the wealth effect is not supported in our results.However, we do find strong evidence that variations in housing market wealth have important effects upon consumption.This evidence arises consistently using panels of U.S. states and individual countries and is robust to differences in model specification. The housing market appears to be more important than the stock market in influencing consumption in developed countries.

Wealth Effects, Stock Market vs Housing