Abstract
We analyze the consumption–wealth relationship using a framework that accounts for transitory variation in wealth, and in a setting where transitory variation in household net worth is not dominated by boom and bust cycles in stock markets. We find that a transitory asset wealth increase coincides with a substantial transitory increase in consumption. In addition, we find that gross asset wealth and household debt are positively related. Both findings constitute departures from standard Permanent Income Hypothesis (PIH) theory with complete financial markets.
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