Stock Market Returns and Consumption
54 Pages Posted: 24 Jan 2018 Last revised: 6 May 2020
Date Written: February 17, 2018
This paper employs Swedish data on households' stock holdings to investigate how consumption responds to changes in stock market returns. We instrument the actual capital gains and dividend payments with past portfolio weights. Unrealized capital gains lead to a marginal propensity to consume (MPC) of 23% for the bottom 50% of the wealth distribution and about 3% for the top 30% of the wealth distribution. Households’ consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are consistent with households treating capital gains and dividends as separate sources of income.
Keywords: Capital gain, Dividend income, Consumption, Near-rational behavior
JEL Classification: E21, D15, G12
Suggested Citation: Suggested Citation