Assessing financial and housing wealth effects through the lens of a nonlinear framework

Abstract

This paper examines the effects of wealth on consumption for the US, the UK and the Euro area using a smooth-transition regression (STR) model. We find evidence of an asymmetric and time-varying relationship between consumption and wealth. Additionally, our model tracks consumption patterns reasonably well during periods of economic downturn, financial instability and housing market corrections. While wealth effects are not significant in the Euro area, they are statistically significant and time-varying in the US and the UK. Interestingly, changes in housing wealth are source of switching between regimes in the US.