How Large Is the Housing Wealth Effect? A New Approach

Christopher D. Carroll, Misuzu Otsuka, Jirka Slacalek

NBER Working Paper No. 12746
Issued in December 2006
NBER Program(s):   AP   EFG   ME

This paper presents a simple new method for estimating the size of 'wealth effects' on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as 'habits' in the asset pricing literature) to distinguish between short-run and long-run wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegration- based estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector.

(248 K)

This paper is available as PDF (248 K) or via email.

An online appendix is available for this publication.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX