Do asset price fluctuations constitute a risk to growth in the major industrialised countries?

Abstract

Asset price fluctuations give grounds for concern in the major industrialised countries. But to what extent do they affect economic growth? The answer to this question partly depends on households’ levels of debt and the structure of their financial wealth. We shall first summarise the different wealth effect estimates. This analysis shows that the impact of asset price fluctuations is more pronounced in the United States and the United Kingdom than in euro area countries. Asset price fluctuations in the United States appear to have an even greater impact on euro area growth than changes in household wealth within the euro area. Overall, outside of the United States and the United Kingdom, wealth effects are fairly limited, despite the existence of spillover effects transmitted through international trade and/or financial markets. Furthermore, these findings seem to be consistent with those obtained using other quantitative approaches that analyse the co-movements between business and financial cycles. They also conclude that, apart from in the United States, a high degree of dependence between economic growth and asset price fluctuations in the short term cannot be identified. We shall then provide an international comparison of the financial position of households (United States, Japan, United Kingdom, Germany, France and Italy). This analysis points to a certain degree of heterogeneity. In particular, the financial vulnerability of US and UK households, which have a larger appetite for debt and risky assets, is greater than that of households of the major euro area countries. In this context, it is not surprising that the shocks affecting asset prices have a more marked effect on household consumption and growth in the United States and the United Kingdom than in the major euro area countries or in Japan.