How the Housing and Financial Wealth Effects have changed over Time

Abstract

We measure the “evolution” of the housing and financial wealth effects over time by estimating the dynamic responses of consumption to both forms of wealth in the United States over different time periods from 1952 to 2009. To understand how the housing and financial wealth effects have changed over time, we use a combination of recent time series techniques, including system structural break tests and linear projections to estimate impulse response functions over relatively short sub-samples. Our key results are that the housing wealth effect gets larger over time, with the largest effect apparent after 1998; while the financial wealth effect diminishes over the same sub-samples, even over periods that include the equities boom of the 1990s. Our results provide insight into what mechanisms may explain the differing responses of consumption to wealth.