Wealth Channel Research Articles

Resource dependence and life expectancy in sub-Saharan Africa: Does financial sector stability break the curse?

Natural resource wealth can contribute to human and economic development if the revenues from natural resource sectors are effectively invested by the government. In particular, countries with abundant natural resources have the potential to experience significant development and improvements in their quality of life. This study first examines the impact of natural resource rents on life expectancy in sub-Saharan Africa. We then investigate the moderating role of the financial sector in this relationship. Using mainly the Generalized Moments Method in a panel of 44 Sub-Saharan African countries over the period 1990–2021, the results obtained in this paper reveal a negative effect of natural resource rents on life expectancy, supporting the resource curse-health hypothesis. However, the stability of the financial system moderates this relationship and makes it positive, at specific thresholds. These results are consistent with Hirschman's conjecture that production leakage is low in landlocked countries, but that there are stronger links with public revenues than with other sectors of activity. The ‘wealth channel’ lubricated by the financial sector that this study identifies calls for greater caution when adopting non-rentier policies in countries exploiting their natural wealth, specifically countries with low human capital. We suggest that a portion of resources should be allocated to financing human capital in order to increase life expectancy.

Local IPOs and Household Stock Market Participation

Abstract The decrease in companies going public has received widespread attention, and the associated costs are widely debated. We document high local IPO activity leads to increases in stock market participation of 5–6%. This is striking given that such participation represents a key factor toward building wealth. Local IPOs increase both households’ propensity to own stock and their percent equity holdings. The attention channel drives effects: local IPOs attract attention to the market, through increased information production and publicity. The wealth channel has little influence, consistent with local IPOs not generating wealth shocks for most households.

Analysis of China's Real Estate Market Volatility and Financial Stability

Fluctuations in China's real estate market profoundly affect the economy, the financial system and social stability. Effective policy regulation, including the adjustment of monetary policy and the control of speculative behavior, is essential to mitigate market volatility and reduce financial risks. This paper uses the historical data analysis method and literature research method to conduct research and analysis based on the study of the meaning of financial stability. Firstly, it divides the historical fluctuation of China's real estate market into four stages and explores the characteristics and causes of real estate price changes in each stage. Thus, the historical fluctuation pattern of China's real estate market and the mechanism by which real estate market fluctuations affect financial stability are derived. The mechanism by which real estate affects financial stability through the personal wealth channel, the balance sheet channel, and the liquidity channel is explored. The findings of this paper can provide a basis for government decision-making and guide real estate practitioners and investors to grasp market fluctuations and avoid potential risks.

Crowding-in or Crowding-out: How Infrastructure Investment Affects Household Consumption

Abstract This paper constructs a dynamic model of household consumption decisions and accordingly designs empirical analyses to identify how infrastructure investment affects private consumption. The estimation results of provincial panel data reveal that infrastructure investment can not only indirectly promote household consumption through the income channel but also directly promote household consumption expansion through the expectations channel, with a significant “crowding-in” effect. However, the effect is significantly weaker in provinces with a lower housing supply elasticity, showing the “crowding-out” pattern through the wealth channel. Household survey data provide an explanation for individual heterogeneity. Infrastructure investment has a greater pushing effect on house prices in provinces with a lower housing supply elasticity. Rapid house price growth has significant “crowding-out” effects on the consumption of wealthy households. This not only significantly weakens the driving effect of infrastructure investment on aggregate household consumption, but also increases wealth inequality in the long term. This paper explains how infrastructure investment affects household consumption and the corresponding role played by house prices, providing empirical evidences for theoretical studies related to macro-regulatory policies in China.

The Transmission of Commodity Price Super-Cycles

Abstract We examine two key channels through which commodity price super-cycles affect the economy: a wealth channel, through which higher commodity prices increase domestic demand, and a cost channel, through which they induce wage increases. By exploiting regional variation in exposure to commodity price shocks and administrative firm-level data from Brazil, we empirically disentangle these transmission channels. We introduce a dynamic model with heterogeneous firms and workers to further quantify the mechanisms and evaluate welfare. A counterfactual economy in which commodity booms are purely endowment shocks experiences only 30% of the intersectoral labour reallocation between tradables and nontradables, and 40% of the within-tradable labour reallocation between domestic and exported production. Finally, the consumption-equivalent welfare gain of a commodity super-cycle is twice as large in the counterfactual economy.

Learning, Central Bank Conservatism, and Stock Price Dynamics

Abstract This paper studies how adaptive learning affects the interactions between monetary policy, stock prices and the optimal degree of Rogoff conservatism in a New Keynesian DSGE model with non-Ricardian agents whose heterogeneous portfolios generate a financial wealth channel of monetary transmission. A positive intergenerational portfolio turnover in the stock market could improve the dual-mandate central bank’s intertemporal trade-off allowed by learning and implies a positive weight on financial stability in the social welfare criterion. For plausible learning gains and turnover rates, a rise in the turnover rate could lead the central bank to reduce the aggressiveness in its policy needed to manage private beliefs if the learning gain is high enough. Both the distortion due to learning and the central bank’s lack of concern for financial stability could lead the government to appoint a liberal central banker, i.e. less conservative than society. A rise in the turnover rate implies a higher (lower) degree of liberalism for low (high) learning gains.

The impact of central bank’s repo balance on monetary policy transmission - evidence from Brazil

ABSTRACT Three hypotheses arise concerning negatives impacts of central bank’s repo balance on monetary policy: (i) short maturity and payments close to policy rate for repos cause a decrease in average maturity of public debt; (ii) repo balance expansions weaken the wealth channel of monetary policy; (iii) agents’ expectations regarding repo expansions undermine other monetary policy instruments. This work seeks to verify the existence of evidence to support these hypotheses, resorting to VAR and impulse-response functions analysis. Evidence is found for a negative effect of repo on public debt’s duration, but not for the other two hypotheses. These suggests an additional cost of resorting to repos for monetary policy execution, albeit smaller than other authors have supposed.

Financial globalization and monetary transmission

AbstractThis article studies the way in which international financial integration affects the domestic transmission of monetary policy in a standard New Keynesian open economy model. It extends Woodford's (2010) model to a framework, in which not only a global integration of goods and factor markets, but also financial markets might matter for the monetary transmission mechanism. The article considers two broad types of experiments meant to capture financial integration, a decrease in the costs of international asset trading and an increase in the level of gross foreign asset holdings. The main finding is that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. On the contrary, under a wide array of parameterizations, and even in an environment where the exchange rate pass‐through elasticity is very low and the Home country's traded goods sector is very small compared to world markets, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. Monetary policy is most effective in simulations interacting the highest degrees of the two forms of financial integration.

Monetary Policy Transmission Mechanism in Macroeconomic Activities in Pakistan (Wealth Channel)

This paper empirically analyzed the monetary policy transmission mechanism for wealth channels by applying Vector Auto Regressive (VAR) technique to time series data for the period of 1991 Q1 to 2018 Q4. Results are found significant. Variables included in the model follow the same direction as the theory suggests. Standard deviation shocks to each variable in variance decomposition results are bitterly transmitted. The performance of this channel on the biases of impulse responses and variance decomposition is better. Policy decisions related to high interest rates should be taken carefully. The level of savings is very poor. Low saving adversely affects investment and GDP. Therefore, better remedies are needed to capture the problem.

Crude oil price changes and exchange rate: Case of oil exporting countries in CEMAC

Purpose: Policy makers, academics and journalists have frequently discussed the link between oil prices and exchange rate in recent years. After the 2014 World’s biggest oil price drop that plunge CEMAC oil exporting countries into an external liquidity strain, due to the pressure raised on Euro to which CFA franc is pegged, this paper revisits the dependence between crude oil price changes and exchange rate.
 Methodology: Crude oil price is the main independent variable, though other independent variables have been considered. The change in crude oil price is captured through differentiation of average yearly crude oil prices. The real effective exchange rate (RER) is the dependent variable, captured with the consumer’s price index (CPI), which describes the strength of a currency relative to a basket of other currencies. The data used in this study were extracted from Word Bank Development Indicators (WBDI, 2020) and World Bank Commodity Price Data. The study covers the period 1990-2018. The main channels of transmission used in this paper are the terms of trade channel, the wealth or portfolio channel and the anticipation or expectation channel. A panel autoregressive distributive lag (ARDL) model was used.
 Findings: The result shows that there is a short run positive and insignificant effect of oil price changes on exchange rate of CEMAC oil producing countries. In the long-run, there is rather a negative and significant impact of oil price changes on exchange rate. More concretely, a unit increase in oil prices depreciates exchange rate of these countries by 0.4340 units and this is significant at 1%. The short run Cross-country analysis shows that the effect is negatively significant for Cameroon and Chad; positive and significant for Democratic Republic of Congo and Equatorial Guinea; but positive and not significant for Gabon. These results are likely linked to structural differences between countries as the dependence on oil revenue and the security situation are concerned.
 Recommendations: Given this negative long run damage of oil prices on exchange rate of CEMAC oil producing countries, it is highly advisable these countries increase direct investments in key economic non-oil sectors in order to reduce dependence. On the other hand, considering the unidirectional causality from exchange rate to oil prices, a policy of exchange rate anchor by BEAC is suitable in order to absorb the shock of oil price changes on exchange rate and eventually inflation in the these economies.

Perception of corruption and public support for redistribution in Latin America

This paper studies the relationship between people’s beliefs about the quality of their institutions, as measured by corruption perceptions, and preferences for redistribution in Latin America. Our empirical study is guided by a theoretical model which introduces taxes into Foellmi and Oechslin’s (2007) general equilibrium model of non-collusive corruption. In this model perceived corruption influences people’s preferences for redistribution through two channels. On the one hand it undermines trust in government, which reduces people’s support for redistribution. On the other hand, more corruption decreases own wealth relative to average wealth of below-average-wealth individuals leading to a higher demand for redistribution. Thus, the effect of perceived corruption on redistribution cannot be signed a priori. Our novel empirical findings for Latin America suggest that perceiving corruption in the public sector increases people’s support for redistribution. Although the wealth channel dominates in the data, we also find evidence for the trust channel — from corruption to demand for redistribution via reduced trust.

Transmission Channel and Effect Analysis of Denmark's Nominal Negative Interest Rate Policy

Denmark is considered to be the most successful example of implementing a nominal negative interest rate policy(NIRP). This paper examines the transmission and effects of the NIRP in Denmark through a TVP-SV-VAR model. The results show that the exchange rate channel of the NIRP in Denmark is effective while the NIRP increases exports and effectively promotes economic growth through Danish krone’s depreciation. And the interest rate channel, the wealth channel and the asset portfolio channel plays a limited role. Denmark's NIRP is effective as it aims to ease the pressure of exchange rate appreciation.

Inheritance and Stockholding: The Role of Expectations

Abstract This paper uses data from the Health and Retirement Study to investigate the role of inheritances for stockholding. Individual heir fixed-effects estimates show that an inheritance receipt increases subsequent stock market participation. The respective magnitude of this shift is higher for large and fully anticipated receipts, whereas it seems to be largest for fully but larger-than-expected transfers. Generally, our effects are driven by households entering the stock market. Also, a less pre-inheritance liquidity constrained household shows higher post-inheritance stock ownership probability. This suggests, inheritance size as well as receipt and size anticipation are determinants for stockholding. In the context of stock market participation, our results highlight considerable heir and transfer heterogeneity which can have important implications for bequest taxation and economic welfare. By means of the intergenerational transmission of inequality and socio-economic status via the ‘wealth channel’, households not only benefit from transfer receipt but also from later capital gains, due to stock market participation.

OIL PRICE FLUCTUATION AND CURRENT ACCOUNTS: EXPLORING MEDIATION EFFECTS FOR OIL IMPORTING NATIONS

The study is an attempt to examine empirically the effects of oil price shock on current account imbalances. The analysis is carried out on the cross-country panel of 160 countries that are divided into three different groups base on their level of oil imports. The relationship between the oil price shock and current account imbalances is rigorously assessed using two different approaches. Firstly, the seemingly unrelated regression models are used to estimate the effects of oil price shock on current account imbalances with transmission channels namely trade, valuation, and wealth. Secondly, to examine the indirect effects of oil price shock three different mediator effects that direct, indirect, and total are estimated. The findings of the study reveal that for all three groups of countries the oil price shock pose a positive effect on the current account through the trade channel. Whereas, the current account of all three groups is negatively associated with oil price shock with the wealth channel. The valuation channel holds a mix results across country groups about the effect of oil price shock on the current account balances. In the case of low and major oil importer countries, oil price shock is negatively associated with the current account, whereas the current account of medium oil importer countries is improving with an increase in oil prices. The mediation analysis holds mix results across groups of countries. Keywords: Current-account imbalances; oil importing economies, seemingly unrelated regression; mediation effectsJEL Classifications: F4; F41DOI: https://doi.org/10.32479/ijeep.11044

Wealth effects on household solar uptake: Quantifying multiple channels

Increased clean energy production from household solar panels is a potentially vital component of a sustainable energy transition and decarbonisation that can reduce carbon dioxide emissions from many countries. This paper investigates multiple channels of wealth effects on household solar-panel uptake. There is evidence of impacts of both financial and non-financial assets on solar-panel uptake, but the evidence for financial assets is much more robust. Compared to the highest-asset quartile, proportional solar-panel uptake is three percentage points lower for the second-highest quartile of households based on financial assets, all else equal. This gap grows to six percentage points for households in the lowest quartile for financial assets. The results are robust across many models using probit, logit and linear probability formats. Knowledge of the relative magnitudes of impacts of wealth channels is important for policymakers who are considering supporting solar-panel uptake, particularly following the COVID-19 pandemic, when efficiency of public spending will be crucial. Our results reveal that means testing for solar policy support should be based on financial-asset thresholds, rather than non-financial assets or income. These are globally important policy lessons in creating a viable climate change adaptation strategy through solar electrification.

Stock market implications of Fed's balance sheet size

PurposeConsidering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed's balance sheet size on stock market performance.Design/methodology/approachTo analyze the Fed's balance sheet size's long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.FindingsFindings in this paper suggest that the Fed's balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.Research limitations/implicationsThe main implication of these findings is that policymakers should avoid a severe imbalance between a central bank's balance sheet size and assets market wealth.Originality/valueThe empirical evidence in this paper documents a century-old relation between the Fed's balance sheet size and US stock market return using the Fed's balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

Local IPOs and Household Stock Market Participation

We posit that IPOs of local companies will lead to increased stock market participation. First, local IPOs attract attention to the market, through both increased information production and publicity. Second, local IPOs generate wealth, not just for people associated with the heretofore private company but also for the wider community through local agglomeration effects. Consistent with predictions, we find that local IPOs increase both households’ propensity to own stock and equity holdings as a percent of wealth. Tests of the mechanisms underlying this relation support the attention channel. We find little evidence in support of the wealth channel. Given prior evidence that stock market participation represents a key factor toward building wealth, our findings highlight that the benefits of IPOs extend beyond those people directly involved with the offering.

The consumption response to borrowing constraints in the mortgage market

This paper shows that relaxing borrowing constraints positively affects household consumption in addition to stimulating housing market activity. We focus on the UK Help-to-Buy (HTB) program, which provided a sudden relaxation of the down payment constraint by facilitating home purchases with only a five percent down payment. Our research design exploits geographic variation in exposure to HTB and uses administrative data on mortgages and car sales in combination with household survey data. We estimate that the program increased total home purchases by 11 percent, and the increase was driven almost entirely by first-time and young buyers. Regions that were more exposed to the program experienced a rise in non-durable consumption unrelated to the home and in loan-financed car purchases, in addition to an increase in home-related expenditures. These results are independent of changes in regional house prices. Our findings point to a further link between the housing market and household consumption that does not operate through the home purchase and housing wealth channels.

Real Effects of the ECB's Quantitative Easing: A Housing Portfolio Channel

We propose a new housing portfolio channel through which QE affects output. In response to QE, intermediaries rebalance portfolios from bonds to houses, lowering the return to saving and stimulating consumption and output. We study this channel empirically in a German housing boom without credit boom. Identification exploits regional variation in land scarcity to measure exposure. Our channel accounts for 60-80% of the total QE impact, with the term spread, the credit, collateral and wealth channels accounting for the remainder. To illustrate our channel, we also set up a simple portfolio model with preferred habitat investing in local housing markets.

Housing returns, precautionary savings and consumption: Micro evidence from China

We investigate how changes in home prices affect consumption in China via a wealth channel. Examining a panel of 7955 households via fixed effects and instrumental variable methods, we find a marginal propensity to consume out of housing wealth (home-price MPC) that is concentrated on goods consumed for pleasure rather than necessity. This trend is driven by the value of second homes rather than that of primary residences, suggesting a wealth channel. We further examine whether returns on housing investment, including rental income and home appreciation, fund the wealth channel; however, we find little supporting evidence. In contrast, a reduction in health risk increases the home-price MPC, but a reduction in income risk that also relieves precautionary saving motives does not. Our results are robust to alternative data, common-factor progress, expenditure shocks and bequest motives. We contribute by examining second homes, which carry little of the dual nature of housing that primary residences do, to identify a controversial wealth channel, and by studying the relative effects of health and income risks on the wealth channel.