DP5874 Wealth Effects on Consumption: Microeconometric Estimates from a New Survey of Household Finances

Author(s): Olympia Bover

Publication Date: October 2006

Keyword(s): wealth effects , precautionary savings , house prices , two-stage least squares matching

JEL(s): D91

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP5874.asp.asp

This paper presents estimates of wealth effects on consumer spending using the first wave of a new survey of household finances (EFF 2002) that contains direct measures of asset holdings and consumption. A distinguishing feature of the EFF is the availability of such information from a representative sample subject to stratification by wealth. Furthermore we believe we are able to measure wealth effects due to precautionary motives only. This is confirmed by the estimated pattern of wealth effects across age groups. To control for the potential endogeneity of housing wealth, we exploit geographical house price variation and inheritance information in the EFF as instrumental variables. We focus on the effects of housing wealth, distinguishing between main and secondary housing, but also report OLS estimates of financial wealth effects. We find large and statistically significant housing wealth effects for prime age households. Overall, the largest wealth effects are for owner occupied housing, followed by secondary housing, with financial wealth effects being smaller and insignificant.