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The Journal of Real Estate Finance and Economics

, Volume 35, Issue 4, pp 427–448 | Cite as

Does Consumption Respond More to Housing Wealth Than to Financial Market Wealth? If So, Why?

  • N. Kundan Kishor
Article

Abstract

This paper uses long-run equilibrium relationship between consumption and different components of wealth to estimate the effect of changes in housing wealth and financial wealth on consumption. By exploiting this long-run property, it has been shown that a dollar increase in housing wealth increases consumption by seven cents, whereas, a corresponding dollar increase in financial wealth increases consumption by only three cents. This difference in the wealth effect arises because transitory shocks dominate variation in financial wealth, whereas permanent shocks account for most of the variation in housing wealth. This paper also shows that the relative importance of permanent component for housing wealth has witnessed an increase over the last thirty years. Therefore, housing wealth effect has also increased over time.

Keywords

Beveridge–Nelson cycle Cointegration Consumption Kalman filter State-space model Wealth effect 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  • N. Kundan Kishor
    • 1
  1. 1.University of Wisconsin-MilwaukeeMilwaukeeUSA

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