Andriy Avramenko, Colby College

Date of Award

2004

Document Type

Honors Thesis (Open Access)

Department

Colby College. Economics Dept.

Advisor(s)

Michael R. Donihue

Second Advisor

Clifford Reid

Abstract

This paper investigates the effects of wealth on consumer spending in the United States. A traditional life-cycle model is estimated first. Although it does find a statistically significant wealth effect, its findings are unusable due to the presence of autocorrelation and non-stationarity. Variables in logarithmic forms are found to be cointegrated. Thus, a logarithmic model with the Stock-Watson adjustment and an AR(I) term is estimated instead. Three extensions to this model are offered. First, wealth is divided into stock market and non-stock market components, second into liquid and illiquid components. Finally, a new approach to the wealth division is introduced, with consumers' wealth segregated into Liquid stock market, illiquid stock market, liquid non-stock market and illiquid non-stock market wealth. The findings show that wealth effects on consumption do exist but their size depends on the type of wealth and the length of the decision horizon. Most estimates of the marginal propensity to consume out of different types of wealth are in line with previous research. An important implication of this paper's results is that conventional studies of wealth effects on consumption, that do not disaggregate wealth and do not analyze long-run versus short-run changes. may give potentially incorrect estimates.

Keywords

Consumption (Economics), Consumer behavior -- Mathematical models, Consumers -- United States -- Statistics, Consumers -- United States -- Mathematical models, Wealth -- United States

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