Daniel Cooper

Wealth Effects and Macroeconomic Dynamics

The effect of wealth on consumption is an issue of long‐standing interest to economists. Conventional wisdom suggests that fluctuations in household wealth have driven major swings in economic activity both in the United States and abroad. This paper considers the so‐called consumption wealth effects. There is an extensive existing literature on wealth effects that has yielded some insights. For example, research has documented the relationship between aggregate household wealth and aggregate consumption over time, and a large number of household‐level studies suggest that wealth effects are larger for households facing credit constraints. However, there are also many unresolved issues regarding the influence of household wealth on consumption. We review the most important of these issues and argue that there is a need for much more research in these areas as well as better data sources for conducting such analysis.

Impending U.S. Spending Bust? The Role of Housing Wealth as Borrowing Collateral

Using data from the Panel Study of Income Dynamics, this paper considers the mechanism by which changing house values impact U.S. household spending. The results suggest that house values affect consumption by serving as collateral for households to borrow against to smooth their spending. The results show that the consumption of households who need to borrow against their home equity increases by roughly 11 cents per

Wealth Shocks and Macroeconomic Dynamics

1.00 increase in their housing wealth. Changing house values, however, have little effect on the expenditures of households who do not need to borrow to finance their consumption. Based on these results, the paper further finds that declining housing wealth has a relatively small implied negative impact on aggregate consumption expenditures.

The S&P 500 effect: not such good news in the long run

The effect of wealth on consumption is an issue of longstanding interest to economists. Analysts believe that fluctuations in household wealth have driven major swings in economic activity. This paper considers so-called wealth effects—the impact of changes in wealth on household consumption and the overall macroeconomy. There is an extensive existing literature on wealth effects, but there are also many unanswered issues and questions. This paper reviews the important issues regarding the role wealth plays in the macroeconomy and argues that there is a need for much more wealth effect research as well as better data sources for conducting such analysis.

Changes in U.S. Household Balance Sheet Behavior after the Housing Bust and Great Recession: Evidence from Panel Data

This paper analyzes the effect on a companys stock price when it is added to the S&P 500 Index. A simple theoretical model is developed to show how trading effects and changes to fundamentals should affect the price of S&P500 additions upon announcement and in the long run. This model predicts that a company added to the S&P500 should experience an initial price increase followed by a reversal of this price increase owing to the predicted increased stock price volatility of companies post-addition. All of these effects should be growing over time because of the increasing importance of S&P500 indexed mutual funds. We test the predictions of the model using a sample of 303 S&P500 Index additions between 1978 and 1998. We find results generally consistent with the model, particularly in the most recent period when it appears that the post-addition increase in stock price volatility reverses almost all of the initial price increase.

Did Easy Credit Lead to Overspending? Home Equity Borrowing and Household Behavior in the Early 2000s

This paper uses panel data through 2011 to examine evidence of shifts in household balance sheet behavior following the financial crisis and Great Recession. The paper considers evidence of balance sheet repair through debt repayment as well as changes in the composition of households’ balance sheets and/or saving decisions to determine whether households’ desire for holding or investing in riskier versus safer assets has changed. The data show relatively small and limited balance sheet adjustment—especially for those households considered the most likely to have been impacted by the economic collapse. The adjustment that did occur typically raised households’ liquid asset holdings and/or saving and reduced their risky asset positions (stocks). There is also some evidence of increased nonhousing debt repayment and slower takeup of new nonhousing debt. Overall, the findings are inconsistent with major adjustments occurring in households’ balance sheet behavior—especially to the extent where these shifts would have contributed substantially to the sluggish economic recovery