Wealth Shocks and Macroeconomic Dynamics

Abstract

The effect of wealth on consumption is an issue of longstanding interest to economists. Conventional wisdom suggests that fluctuations in household wealth have driven major swings in economic activity. This article considers so-called consumption wealth effects. There is an extensive existing literature on wealth effects that has yielded some insights. For example, research has documented the average historical relationship between aggregate household wealth and aggregate consumption, and a large number of household-level studies suggest that wealth effects are larger for households facing credit constraints. However, there are also many unresolved issues regarding the influence of household wealth on consumption. We review the most important of these issues and argue that there is a need for much more research in these areas as well as better data sources for conducting such analysis.

Keywords: Housing Wealth, Financial Wealth, Wealth Effects, Consumption, Borrowing Constraints, Saving, Household Debt, Deleveraging

JEL Classification: D1, E21, E44