Date of Award
Honors Thesis (Open Access)
Colby College. Economics Dept.
Conventional estimates of the marginal propensity to consume (MPC) out of changes in net worth average about 4 cents on the dollar. If this is true, the $14 trillion rise in household net worth between 1995 and 2000 created an additional $567 billion in household consumption. This increase in net worth was driven almost entirely by the rising values of security prices in the contemporary bull market. This study presents evidence that this "wealth effect" is in fact asymmetrical and that this asymmetry reversed some time during the 1970's or 1980's. Prior to this reversal point positive changes in slock market wealth had no statistically significant impact on personal consumption. After this reversal point, the mpc of positive changes in stock market wealth becomes positive and statistically significant in determining the rate of personal consumption growth, while negative changes show no statistically significant impact on personal consumption. This reversal was likely caused by a change in consumer expectations for stock market growth. This finding has important implications for fiscal and monetary policy; namely that neither policy stance should be changed out of fear that a bear market will cut aggregate demand through a direct wealth effect.
Consumer behavior -- Mathematical models, Consumers -- United States -- Statistics, Stock exchanges -- Mathematical models, Stock exchanges -- Psychological aspects
Recommended CitationGreene, Jonathan, "Asymmetric wealth effect : American consumption and the stock market" (2002). Honors Theses. Paper 108.
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