On the Stability of the Wealth Effect
Departamento de Economia/NIPE, Universidade do Minho
GEMF/Faculdade de Economia, Universidade de Coimbra
Vasco J. Gabriel
University of Surrey (UK) and NIPE, Universidade do Minho
Evidence of instability of the wealth effect in the USA is presented through the estimation of a Markov switching model of the long-run aggregate consumption function. The dating of the regimes appears to bear relation to movements in asset prices. A model-based explanation of the findings is suggested, highlighting the importance of the short-run relation between consumption, income and wealth in explaining the estimated long-run coefficients.
Keywords: Parameter instability; Markov switching; Consumption; Wealth effect.