Affiliation:
1. Center for Economic Behavior and Inequality, University of Copenhagen (email: )
2. Centre for Business Taxation, Oxford University and the Center for Economic Behavior and Inequality (CEBI), University of Copenhagen (email: )
3. Amazon (email: )
Abstract
How much and over what horizon do households adjust their consumption in response to stock market wealth shocks? We address these questions using granular data on spending and stock portfolios from a large bank and exploiting lottery-like variation in gains across investors with similar portfolio characteristics. Consistent with the permanent income hypothesis, spending responses to stock market gains are immediate and persistent. The monthly responses cumulate to marginal propensities to consume of 4.4 percent over one year and 16 percent over three years. The results suggest that inattention attenuates household responses to stock market cycles over horizons as long as one year. (JEL D12, E21, G11, G14, G51)
Publisher
American Economic Association
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