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How Large Are Housing and Financial Wealth Effects? A New Approach


  • This paper is based on material originally prepared for an Academic Consultants’ meeting of the Board of Governors of the Federal Reserve System, January 30, 2004; for the version of the paper originally presented at the Fed, see Carroll (2004). We thank the discussant of that paper, Robert Shiller, as well as Pok-sang Lam (the editor), two anonymous referees, Ben Bernanke, Alan Greenspan, Robert Hall, Nicholas Souleles, David Wyss, Stephen Zeldes, the staff of the Fed, and other attendees at the meeting for very valuable feedback. The data and econometric programs that generated all of the results in this paper are available in the archive ( We are also grateful to Emmanuel de Veirman and Sherif Khalifa for excellent research assistance. The views presented in this paper are those of the authors, and should not be attributed to the Organisation for Economic Co-operation and Development or the European Central Bank.


This paper presents a simple new method for measuring “wealth effects” on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption “habits”) to distinguish between immediate and eventual 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 eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration-based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.