Mutual Funds and the Stock Wealth Channel in the U.S.

Equity mutual fund loads have fallen, while stock ownership rates and equity mutual fund use have risen, plausibly boosting the stock wealth elasticity of U.S. consumption. Because of limited wealth and diversification needs, load declines likely spurred middle-income families to invest in equity, consistent with cross-section data and the calibration model of Heaton and Lucas (2000). In load-modified models, the stock wealth elasticity is declining in loads and more stable long-run wealth and income coefficients are obtained. These modified models imply that although the wealth elasticity has risen, conventional models overestimate the wealth elasticity and underestimate the income elasticity of consumption.