The effect of housing and stock market wealth on consumption in emerging and developed countries

- We model stock market and housing wealth effects on consumption in emerging and developed economies.
- The long-run stock wealth effect is the strongest in developed market-based countries and the weakest in emerging countries.
- The long-run housing wealth effect is the strongest in emerging countries.
- In the short run, consumption in emerging countries is not affected by changes in wealth components.
- Stock wealth effects are present in the short run in market-based and bank-based developed countries, while the short-run housing wealth effect is present in developed market-based countries.

This study examines the long- and short-run relationship between private consumption, housing wealth, stock market wealth and income. In order to asses this relationship empirically, we use pooled mean group estimators of dynamic heterogeneous panel data on a sample of 30 developed and emerging economies. The sample countries are segmented into three separate panels: a developed bank-based panel, a developed market-based panel, and an emerging bank-based panel. Empirical estimates support the existence of long- and short-run stock market wealth effects in both groups of developed countries, with the effect being particularly strong in the developed market-based countries. A moderate long-run housing wealth effect is confirmed only for the developed bank-based countries, while a very strong short-run housing wealth effect is present in the developed market-based countries. As far as the emerging countries are concerned, the evidence is somewhat inconclusive, but it does seem to suggest that both wealth effects are effective in the long run, with housing wealth being more dominant.