The clash of the Titans: financial and housing wealth effects on consumption

Abstract

In this paper, we examine and compare the effects of the financial and housing wealth on consumption. By using quarterly data from the United States economy, we investigate the impact of financial and housing wealth on consumption. Based on the seminal paper of Case, Quigley and Shiller (2013) and expanding the sample size by including the periods from the first quarter of 2012 to the first quarter of 2016, we found that stock market wealth has a greater impact on consumption than housing wealth. Specifically, in our basic model that was utilized in the present study, the elasticity was 0.064 for stock wealth and 0.045 for housing respectively. These results are not in agreement with the ones obtained by Case, Quigley and Shiller. In a next stage, we divided our data into two groups, based on the calculated United States average income: a) in the first group were included the 26 States with the highest average income, from 1975 to 2016, according to the Federal Reserve Economic Data, and b) in the second group, the 25 States with income below the United States average. Finally, all the above process was repeated only for the period 1986-2016. The results showed that for the top 26 States stock wealth effects were greater than housing effects, whereas the effects for the U.S. states with a lower income were the opposite. The results proved to be more robust for the sample period between 1986 and 2016.