Time-Varying Effects of Housing and Stock Prices on U.S. Consumption

Abstract

This paper applies a time-varying parameter vector autoregressive (TVP-VAR) approach to estimate the relative effects of housing and stock prices on US consumption over time. We use annual data from 1890 to 2012 and find that over different horizons and over time, generally the housing price positively affects consumption while the stock price negatively affects consumption. These opposite responses to changes in housing and stock prices suggest different mechanisms through which wealth affects consumption. Further, the housing price effect proves larger in absolute value than the stock price effect after 1980. Between 1980 and 2007, housing wealth generally exerted a larger effect on consumption. This sub-period includes the 1997/2002 asset price boom/bust where house prices continued to rise moderately as stock prices fell. Finally, the co-occurrence of the decline in both housing and stock prices during the 2007-2009 episode produced bigger effects of the housing price for the first five years of the impulse responses while the higher magnitude of the stock price effect appears in the 6-year horizon. These findings suggest that the magnitude of the relative price effects differs with both time and horizons and also depends on whether prices increase or decrease.