Abstract
We investigate for the presence of multi-horizon wealth effects across U.S. states over the period of 1975:Q2 to 2012:Q2 by utilizing multi-horizon non-causality testing and multi-horizon causality measurement. At the state/aggregate level, we document that housing wealth has more statistically significant and persistent impact on private consumption than financial wealth. We also find that state-level housing/financial wealth effects are present at long time horizons and exhibit heterogeneity across the U.S. From a policy perspective, we suggest that state-level policies may specifically utilize the housing market to support consumption and growth.
Highlights
Evaluating the dynamics of the wealth effect on the U.S economy has been growing in importance in the wake of the recent housing bubble
The goal of this paper is to better understand the wealth effect-induced household consumption behaviors in the U.S states, in particular: (i) whether state-level wealth effect dynamics in the U.S differ from aggregate level dynamics, (ii) whether wealth effect upon consumption occurs at different time horizons at the state level, (iii) which wealth effect component is more intense in the short-run and long-run, (iv) whether the results are robust to different model specifications, and (v) whether the U.S states can be classified with respect to which wealth effect is more dominant based on some criteria such as short-/long-term persistency and magnitude of coefficient value of a wealth effect component
The housing and financial wealth effects on consumption have been widely analyzed for the U.S economy due to housing and stock market-centered policies since the mid1990s
Summary
Evaluating the dynamics of the wealth effect on the U.S economy has been growing in importance in the wake of the recent housing bubble. This paper uses an expanded dataset with regional data to reinvestigate the classic research problem of wealth effect, or the link between wealth and consumption [7] in the U.S In this respect, except for [8], no comprehensive systemic analysis has been conducted using data for the U.S economy at the state-level. An analysis of the causality linkages between wealth and consumption across different prediction horizons and states provides a micro-level fresh perspective to the empirical literature
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