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Wealth Effects in Europe: A Tale of Two Countries (Italy and the United Kingdom)
Author:
Ms. Sònia Muñoznull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 030
Language:
English
Publication Date:
01 Jan 2006
DOI:
https://doi.org/10.5089/9781451862904.001
ISBN:
9781451862904
ISSN:
1018-5941
Pages:
53
Keywords:
WP; consumption function; monetary policy; Wealth effects; consumption behavior; household portfolio; switching regressions; selectivity models; European capital markets; liquidity constraint; wealth effect; risky assets; transmission mechanism; life-cycle model; risk asset puzzle; utility function; smoothing consumption; consumption growth; Consumption; Income; Stocks; Liquidity; Capital markets; Europe; consumption capital asset pricing model puzzle; consumption function equation; selection equation; Asset prices
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper investigates the increasing exposure of European households to risky financial assets and the consequent impact on the economy. I analyze household data for Italy and the United Kingdom, countries that differ dramatically in their financial structure and capital markets. I estimate an endogenous switching model with bivariate switching to overcome two important obstacles in this line of research, namely, the consumption Capital Asset Pricing Model Puzzle and the excess sensitivity puzzle. The results show that there are wealth effects in both countries. I find some evidence of liquidity constraints only in Italy and habit formation exclusively in the United Kingdom.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2006: Issue 030