Essays in Memory of Albert Ando
Edited by Lawrence R. Klein
Chapter 3: Do Capital Gains Affect Consumption? Estimates of Wealth Effects from Italian Households’ Behavior
3. Do capital gains aﬀect consumption? Estimates of wealth eﬀects from Italian households’ behavior Luigi Guiso, Monica Paiella and Ignazio Visco 1. INTRODUCTION1 Whether and how much changes in consumers’ wealth aﬀect their consumption decisions is relevant for a number of reasons, including a better understanding of how asset prices impact on the economy and how monetary policy works. Following the seminal contributions of Modigliani, Brumberg and Ando2 of about half a century ago, there has been a lively and important debate on the nature of the relationship between wealth and consumption and on the timing of the ‘wealth eﬀects’ that changes in asset prices may have on consumption. More recently, the question about the relevance of wealth eﬀects in consumption has been raised in connection with the stock market boom of the 1990s and the slump of the last few years.3 In this chapter we study the eﬀects of changes in the market price of consumer assets using micro data on Italian households available biannually for more than a decade. We isolate two sources of wealth revaluations, changes in the market value of housing and changes in the market value of stocks, but focus primarily on the former. Whether the dramatic changes in stock prices that have been observed during the 1990s have aﬀected consumption or not is of primary importance to understanding the businesscycle eﬀects of stock market booms and crashes. Many studies have indeed focused on the eﬀect...
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