Abstract
We perform robust bilateral Granger causality tests for the US stock prices, home prices, and private consumption. The robust test procedures involve the use of recently developed time series analysis of non-stationary data with possible structural breaks. We find the underlying data to be generally non-stationary and non-cointegrated. The empirical results indicate the presence of bilateral causality between stock prices and home prices and between stock prices and consumer spending. The results show unilateral causality from home prices to consumer spending. Our findings support the reinforcing effects of stock and home price movements on private consumption, as well as the feedback effect of consumer spending on stock prices.
Highlights
There is widespread empirical support for the proposition that household wealth, dominated by the values of stock holdings and homes, is a key determinant of private consumption expenditure [1,2,3,4,5,6,7,8,9]
The results show unilateral causality from home prices to consumer spending
In the light of the foregoing, this paper provides formal tests of bilateral causality between stock prices, home prices, and consumer spending, and finds evidence of, firstly, bilateral causality between stock prices and home prices and between stock prices and consumer spending
Summary
There is widespread empirical support for the proposition that household wealth, dominated by the values of stock holdings and homes, is a key determinant of private consumption expenditure [1,2,3,4,5,6,7,8,9]. There is less information, on whether there is a causal relationship between stock and home prices, or whether there is a feedback from consumer spending to home values. Information on the nature of such causal relationships is relevant in the light of the recent burst of the real estate bubble and its ensuing adverse economic and financial consequences. It is important, for example, to discern to what extent the recent recovery of the stock market can be instrumental in reviving the fortunes of both the real estate market and consumer spending. Important is to determine whether in the absence of any significant improvement in the levels of employment and consumer spending, there can be any lasting recovery in home prices
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