Decomposing the Wealth Effect on Consumption

We decompose the wealth effect on consumption into two components. First, we distinguish between exogenous and endogenous wealth changes. Second, we distinguish between anticipated and unanticipated exogenous changes. We estimate the impact of exogenous components using data from the 2008-10 panel of the Italian Survey of Household Income and Wealth. The wealth effect is about 3 cents per (unexpected) euro increase in wealth, and driven by house price changes. The consumption response to anticipated changes in wealth is of similar magnitude and also driven by housing. We show that these findings are consistent with binding borrowing constraints.

We decompose the wealth effect on consumption into two components. First, we distinguish between exogenous and endogenous wealth changes (due to changes in prices or portfolio choice, respectively). Second, we distinguish between anticipated and unanticipated exogenous changes. We estimate the impact on consumption of the exogenous components using microeconomic data on consumption, wealth, and subjective asset price expectations available from the 2008-10 panel of the Italian Survey of Household Income and Wealth. We estimate an overall wealth effect of about 3 cents per (unexpected) euro increase in wealth, primarily driven by changes in housing prices. The consumption response to anticipated changes in wealth is also large and significant, of the same magnitude as the response to unanticipated changes, and similarly driven by changes in housing wealth. We provide evidence that this "excess sensitivity" result is consistent with binding borrowing constraints.