What Drives Personal Consumption? The Role of Housing and Financial Wealth

Abstract

I investigate the effect of total, financial and housing wealth on per- sonal consumption in aggregate data from 16 industrial countries. The baselineestimationmethodbasedonsluggishnessofconsumptiongrowth impliesthatthelong-runmarginalpropensitytoconsumeoutoftotalwealth averaged across countries lies in the neighborhood of 5 cents. I find sub- stantial heterogeneity in the wealth effects: the individual country esti- mates are typically between 0 and 10 cents. The wealth effects are more powerful in market-based, Anglo-Saxon and non euro area economies. The effect of housing wealth is somewhat smaller than that of financial wealth for most countries, but not the US and the UK. The housing wealth effect has risen substantially after 1988 as it is becoming increasingly eas- ier to borrow against housing wealth.