Wealth Effects and Consumption: A Multivariate Evaluation

Events of recent years have revived interest in whether wealth effects exist in consumption. Recent studies have obtained contrasting results on wealth effects. Findings and procedures across studies can be categorized as falling in to the "Endogenous Consumption" and "Endogenous Wealth" groups. This paper examines the long-run and short-run dynamic relationship between aggregate consumption, real disposable personal income, and real wealth, including evaluation of potential structural breaks. This study uses methods consistent with the Endogenous Wealth literature. Yet results indicate that consumption is endogenous, and wealth effects exist in consumption. In contrast to past studies, results here also indicate that long-run adjustments to restore equilibrium takes place in all variables, with endogenous wealth and disposable income movements also being a part of the short run dynamic adjustments. * The authors wish to thank Don Bruce, Mohammed Moshin, Robert Bohm, and Ronald Shrieves for their helpful suggestions on this research. Section