Author (Your Name)

Ishan Singh, Colby College

Date of Award


Document Type

Honors Thesis (Open Access)


Colby College. Economics Dept.


Michael R. Donihue

Second Advisor

Jason M. Long


Stock market wealth effects on the level of consumption in the United States economy have been constantly debated; there is evidence for arguments for and against its prominence and its symmetry. This paper seeks to investigate the strength of its negative effect by creating models to analyze unexpected shocks to the Standard and Poor's 500 index. First, a transmission mechanism between the stock market and GDP is established through the use of second-order vector autoregressive models. Following which, theory from the life cycle model and adaptations of previous researchers' models are used to create a structural model. This paper finds that stock market wealth effects are small, but important to consider, especially if markets are overpriced; this claim is corroborated by evidence from simulation of 'alternative scenarios' and the historical experiences of 1987 and 2001.


Stock Market, Household Wealth, Recession, Consumption, United States