Re-Examining the Impact of Housing Wealth and Stock Wealth on Household Spending: Does Persistence in Wealth Changes Matter?

Abstract

Case, Quigley and Shiller (2013) distinguished and quantified two wealth effects in retail sales at the state level: one from wealth held as corporate stock and one from wealth held in the form of home ownership. Here we investigate how each of these wealth effects varies by frequency -- that is, over different levels of persistence in the wealth fluctuations. Using the Case, Quigley and Shiller state-level panel data over the period from 1975Q1 to 2012Q2, and separately modeling the financial crisis period of 2008Q1 onward, we estimate a dynamic fixed-effects model for retail sales, allowing for endogeneity in both wealth variables. We find that the quarterly growth rate of state-level retail sales responds differently to fluctuations in these two wealth variables at different persistent levels. In particular, retail sales respond more intensely to highly-persistent fluctuations in stock wealth, and respond more strongly to less-persistent (more transitory) fluctuations in housing wealth.