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This paper builds upon Chapter 2 of the World Economic Outlook, May 2001 (IMF (2001)). We would like to thank Yutong Li for excellent research assistance and John Ammer, Tamim Bayoumi, Peter Christoffersen, Karen Dynan, Piti Disyatat, Peter van Els, Jan Hatzius, Michael Kiley, Laura Kodres, and Anders Sørensen for comments and suggestions.
In Edison and Sløk (2001) we analyze the impact from changes in new and old economy stock valuations on private investment.
The interest rate is not included in this specification since the substitution effect between current and future consumption is expected to be relatively small (which is also confirmed by the data for the countries analyzed here).
The downside of using retail sales for consumption is that we exclude consumption of services. The upside of using retail sales is that we can reasonably estimate the model using monthly data starting in 1990 when TMT may have started to play a different role in the economy.
Trace-tests for cointegration suggest that for all countries one cointegration vector exists, which can be interpreted as a consumption function. The reduced form VAR was chosen since it does not impose potentially faulty restrictions on the system (due to the short period analyzed), and in addition, calculating confidence intervals for impulse-response functions when cointegration is imposed, requires additional restrictive assumptions.
Such aggregation and tests are easy to do as the individual coefficient estimates can be assumed to be independent.
Note, that there is no exchange rate conversion taking place and hence the numbers do not change if we instead write for example “cents per euro”. Cents-per-dollar was used for all countries to keep the description of the results as simple as possible.
To be precise, the estimated two-year elasticity from the impulse-response functions was multiplied by aggregate consumption in 2000 in order to calculate the wealth effect measured in dollars. Since the estimated elasticity is on retail sales (and not aggregate consumption, which is not available on monthly data) the figure was corrected for the elasticity from consumption to retail sales which about 0.5, and this figure was then multiplied on the estimated dollar amounts in order to get the dollar wealth effect for aggregate consumption. This assumption implies that the wealth effect applies more to durable goods than to services. The aggregate consumption dollar wealth effect was then divided by the dollar change in market value using TMT and non-TMT market values in December 2000 to arrive at the cents-per-dollar figures shown in the table. Applying instead the level of consumption in the mid-1990s and the average market caps in the mid-1990s increases the cents-per-dollar impacts, since the ratio of consumption to market capitalization in most countries was higher than it was in 2000. For example, using consumption and market capitalization data for the United States for 1995 yields approximately a 6 cents-per-dollar impact for both TMT and non-TMT.