A Primer on the Economics and Time Series Econometrics of Wealth Effects: A Comment

33 Pages Posted: 3 Oct 2006

See all articles by Martin Lettau

Martin Lettau

University of California - Haas School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Sydney C. Ludvigson

New York University - Department of Economics; National Bureau of Economic Research (NBER)

Nathan A Barczi

Massachusetts Institute of Technology (MIT)

Date Written: May 2001

Abstract

In a recent paper ("A Primer on the Economics and Time Series Econometrics of Wealth Effects," 2001), Davis and Palumbo investigate the empirical relation between three cointegrated variables: aggregate consumption, asset wealth, and labor income. Although cointegration implies that an equilibrium relation ties these variables together in the long run, the authors focus on the following structural question about the short-run dynamics: "How quickly does consumption adjust to changes in income and wealth? Is the adjustment rapid, occurring within a quarter, or more sluggish, taking place over many quarters?" The authors claim that their findings answer this question, and imply that spending adjusts only gradually after gains or losses in income or wealth have been realized. We argue here, however, that a statistical methodology different from that used by Davis and Palumbo is required to address these questions, and that once it has been employed, the resulting empirical evidence weighs considerably against their interpretation of the data.

Keywords: wealth effect, cointegretion, permanent income

JEL Classification: E2, G12, C53

Suggested Citation

Lettau, Martin and Ludvigson, Sydney C. and Barczi, Nathan A, A Primer on the Economics and Time Series Econometrics of Wealth Effects: A Comment (May 2001). FRB of New York Staff Report No. 131, Available at SSRN: https://ssrn.com/abstract=921886 or http://dx.doi.org/10.2139/ssrn.921886

Martin Lettau (Contact Author)

University of California - Haas School of Business ( email )

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HOME PAGE: http://faculty.haas.berkeley.edu/lettau/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Sydney C. Ludvigson

New York University - Department of Economics ( email )

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HOME PAGE: http://www.econ.nyu.edu/user/ludvigsons/

National Bureau of Economic Research (NBER)

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Nathan A Barczi

Massachusetts Institute of Technology (MIT) ( email )

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Cambridge, MA 02139-4307
United States

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