The Wealth Effects of Housing- and Stock Market Wealth on Consumption Expenditure: A Cross Country Analysis

Since the housing- and stock market seem to be recovering after the crash caused by the financial crisis of 2008, the interest in the relationship between housing- and stock market wealth effects and consumption expenditure has revived. As such, this thesis takes a macroeconomic approach to address those linkages. A panel of 16 industrialized countries with annual observations from 1975 to 2016 is constructed, in which the housing market wealth variable is imputed using country specific homeownership rates. The housing- and stock market wealth effects are estimated by regression models in fixed effects levels, first differences and in an error correction model. A statistically significant and large housing market wealth effect is found with an elasticity of at least 0.1. On the other hand, no significant stock market wealth is found. Furthermore, no increase in wealth effects over time is found, however, the most recent time period (2001-2016) shows that wealth effects are near an all-time high. In addition, it hasn't been found that the household behavior regarding wealth effects has significantly changed after experiencing the financial crisis. Moreover, it is found that wealth effects are symmetrical and thus house price decreases have significant effects on decreases in consumption expenditure. Those findings combined give a vital perspective as to how households behave with respect to wealth effects and give wider implications for the aggregate economy. Finally, some policy advice is given with regards to consumption expenditure and wealth effects.