Skip to main content

Advertisement

SpringerLink
Log in

Housing and stock market wealth effects in developing economies

  • Original Paper
  • Published:
International Economics and Economic Policy Aims and scope Submit manuscript

Abstract

While there has been a copious emphasis on wealth effects in macroeconomic analysis in advanced economies, it has remained an underexplored subject for developing economies. This paper specifically examines the existence of stock and housing wealth effects in developing countries. Further, it examines the related question of how differently the consumption responds to changes in a specific type of wealth, and to what extent the degree of financial deepening alters the intensity of wealth effect. Empirical inquiry, using panel data of 20 large emerging market and developing countries over the period 1996:Q1 to 2019:Q4, reveals a strong housing wealth effect, which could be attributed to dispersed ownership and households’ belief in the durability of wealth gains. In contrast, there is a lack of ample evidence of any significant positive stock market wealth effect, rather we find the presence of a somewhat small negative stock wealth effect, which could be associated with skewed holdings of stock wealth and uncertainty in wealth gains. However, finding from the sample of countries characterized by a higher degree of financial deepening, reveals that the stock market wealth effect turns positive and significant when the financial sector crosses a threshold of development. Besides, the housing wealth effect turns stronger with greater financial deepening and dominates the stock market wealth effect. Thus, as developing countries attain higher financial development, the wealth effect channel may turn prominent in influencing business cycle behaviour, macroeconomic aggregates and policy responses.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. See Case et al. (2001) for a discussion on the role of these factors in influencing wealth effect dynamics.

  2. All three studies i.e., Peltonen et al. (2009), Ciarlone (2012), and Ahec Sonje et al. (2014) rely on a mixed sample of EMEs and AEs, which do not truly represent the emerging market economies. These studies include AEs viz, Hong Kong, Korea, Singapore, and Taiwan in Asia, and the Czech Republic, Estonia, Latvia, Lithuania, Slovakia, and Slovenia in Europe. The sample of 14 EMEs used by Peltonen et al. (2009), includes four AEs. Similarly, in Ciarlone (2012), in a sample of 16 countries, nine countries fall in the category of advanced economies. In the sample used by Ahec Sonje et al. (2014), within a thin sample size of nine countries, four countries fall in the category of advanced countries.

  3. We have used commercial banks' average lending rates to capture the cost of the mortgage. However, for some countries, where we do not have a consistent times series on lending rates, we have proxied it by using a 10-year government bond rate.

  4. The Gini Index, available on annual basis, has been interpolated to convert into quarterly frequency for our empirical exercise.

  5. The sample countries account for 45% of the world GDP based on purchasing-power-parity.

  6. We have a sub-sample with average bank credit to GDP ratio above the full sample average, which includes Brazil, Chile, China, Croatia, Malaysia, South Africa, and Thailand.

References

  • Ahec Sonje A, Ceh Casni A, Vizek M (2014) The effect of housing and stock market wealth on consumption in emerging and developed countries. Econ Syst 38:433–450

    Article  Google Scholar 

  • Allen F, Gale D (2000) Asset price bubbles and monetary policy. Center for Financial Institutions Working Papers 01-26, Wharton School Center for Financial Institutions, University of Pennsylvania

  • Ando A, Modigliani F (1963) The “Life Cycle” hypothesis of saving: aggregate implications and tests. Am Econ Rev 53:55–84

    Google Scholar 

  • Arcand JL, Berkes E, Panizza U (2011) Too much finance. Unpublished, The Graduate Institute, Geneva

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297

  • Arellano M, Bover O (1995) Another look at the instrumental-variable estimation of error-components models. J Econom 68:29–51

    Article  Google Scholar 

  • Badarinza C, Balasubramaniam V, Ramadorai T (2019) The household finance landscape in emerging economies. Annu Rev Financ Econ 11:109–129

    Article  Google Scholar 

  • Bebczuk R, Gasparini L, Garbero N, Amendolaggine J (2015) Understanding the determinants of household saving: micro evidence for Latin America. CEDLAS, Working Papers 0189, CEDLAS, Universidad Nacional de La Plata

  • Belsky E, Prakken J (2004) Housing wealth effects: housing’s impact on wealth accumulation, wealth distribution and consumer spending. National Association of Realtors, Chicago

    Google Scholar 

  • Boone L, Giorno C, Richardson P (1998) Stock market fluctuations and consumption behavior: some recent evidence. OECD Working Paper 208

  • Breitung J (2000) The local power of some unit root tests for panel data. In: Cointegration P, Panels D (eds) Advances in econometrics volume 15 nonstationary panels. Baltagi B H, Amsterdam JAI Press, pp 161–178

    Google Scholar 

  • Calomiris C, Longhofer SD, Miles W (2009) The (mythical?) housing wealth effect. NBER Working Paper 15075

  • Carroll CD (1992) The Buffer-Stock theory of saving: some macroeconomic evidence. Brook Pap Econ Act 2:61–156

    Article  Google Scholar 

  • Carroll J, Otsuka M, Slacalek J (2006) How large is the housing wealth effect? A new approach. NBER Working Paper 12746.

  • Case KE, Quigley JM, Shiller RJ (2001) Comparing wealth effects: the stock market versus the housing market. NBER Working Paper 8606

  • Case KE, Quigley JM, Shiller RJ (2005) Comparing wealth effects: the stock market versus the housing market. Adv Macroecon 5:1235–1235

    Article  Google Scholar 

  • Ciarlone A (2012) Wealth effects in emerging economies. Temi di Discussione No 843

  • Coskun Y, Atasoy BS, Morri G, Alp E (2018) Wealth effect and household final consumption: stock and housing market channels. Int J Financ Stud 6(57):1–32

    Google Scholar 

  • Davies JB (1981) Uncertain lifetime, consumption, and dissaving in retirement. J Polit Econ 89:561–577

    Article  Google Scholar 

  • Davis MA, Palumbo MG (2001) A primer on the economics and time series econometrics of wealth effects. Finance and Economics Discussion Series 2001–09, Board of Governors of the Federal Reserve System (U.S.)

  • Deaton A (1991) Saving and liquidity constraints. Econometrica 59:1221–1248

    Article  Google Scholar 

  • Edison H, Slok T (2001) New economy stock valuations and investment in the 1990s. IMF Working Paper WP/01/78

  • Edison H, Slok T (2002) Stock market wealth effects and the new economy: a cross-country study. Int Financ 5:1–22

    Article  Google Scholar 

  • Friedman MA (1957) Theory of the consumption function. Princeton University Press, Princeton

    Book  Google Scholar 

  • Funke N (2002) Stock market developments and private consumer spending in emerging markets. IMF Working Paper 02/238

  • Funke N (2004) Is there a stock market wealth effect in emerging markets? Econ Lett 83:417–421

    Article  Google Scholar 

  • Hadri K (2000) Testing for unit roots in heterogeneous panel data. Econom J 3:148–161

    Article  Google Scholar 

  • Hesse H (2008) Stock market wealth effects in emerging market countries. VoxEU.org, October 16

  • Im KS, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econom 115:53–74

    Article  Google Scholar 

  • Kao C, Chiang M (2000) On the estimation and inference of a cointegrated regression in panel data. Adv Econ 15:179–222

    Google Scholar 

  • Levin A, Lin C, Chu CJ (2002) Unit root tests in panel data: asymptotic and finite-sample properties. J Econom 108:1–24

    Article  Google Scholar 

  • Ludwig A, Slok T (2002) The impact of changes in stock prices and house prices on consumption in OECD countries. IMF Working Paper No 1

  • Ludwig A, Slok T (2004) The relationship between stock prices, house prices and consumption in OECD countries. Top Macroecon 4:1–28

    Google Scholar 

  • Maddala GS, Wu SA (1999) Comparative study of unit root tests with panel data and a new simple test. Oxford Bull Econ Stat 61:631–652

    Article  Google Scholar 

  • Mark N, Sul D (2003) Cointegration vector estimation by panel DOLS and long-run money demand. Oxford Bull Econ Stat 65:655–680

    Article  Google Scholar 

  • Mishkin FS (2007) Housing and the monetary transmission mechanism. NBER Working Papers 13518, National Bureau of Economic Research

  • Modigliani F, Brumberg R (1954) Utility analysis and the consumption function: an interpretation of cross-section data. In: Economics P-K, Kurihara KK (eds) NJ Rutgers University Press, New Brunswick, pp 388–436

    Google Scholar 

  • Pedroni P (2000) Fully modified OLS for heterogeneous cointegrated panels. Adv Econ 15:93–130

    Google Scholar 

  • Pedroni P (2001) Purchasing power parity tests in cointegrated panels. Rev Econ Stat 83:727–731

    Article  Google Scholar 

  • Peltonen TA, Sousa RM, Vansteenkiste IS (2009) Wealth effects in emerging market economies. European Central Bank Working Paper 1000

  • Pesaran MH, Shin Y, Smith RP (1997) Estimating long-run relationships in dynamic heterogeneous panels. DAE Working Papers 9721

  • Phillips P, Moon H (2000) Nonstationary panel data analysis: an overview of some recent developments. Economet Rev 19:263–286

    Article  Google Scholar 

  • Pichette L, Tremblay D (2003) Are wealth effects important for Canada? Working paper 30, Bank of Canada

  • Poterba JM, Samwick A (1995) Stock ownership patterns, stock market fluctuations, and consumption. Brookings Papers on Economic Activity, 295–357

  • Raunig B, Scharler J (2011) Stock market volatility, consumption and investment: an evaluation of the uncertainty hypothesis using post-war US Data. Austrian Central Bank Working Papers No 168

  • Romer CD (1990) The great crash and the onset of the great depression. Q J Econ 105:597–624

    Article  Google Scholar 

  • Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Economet 16:289–326

    Article  Google Scholar 

  • Rajan RG, Zingales L (1998) Financial dependence and growth. Am Econ Rev 88:559–586

    Google Scholar 

  • Slacalek J (2006) What drives personal consumption? The role of housing and financial wealth. German Institute for Economic Research Discussion Papers 647

  • Starr-McCluer M (1998) Stock market wealth and consumer spending. Finance and Economics Discussion Series 1998–20, Board of Governors of the Fed Reserve System US

  • Wilcox JA (1990) Nominal interest rate effects on real consumption expenditure. Bus Econ 25:31–38

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. International Monetary Fund, 700, 19th Street NW, Washington, DC, 20431, USA

    Bhupal Singh

Authors
  1. Bhupal Singh
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Bhupal Singh.

Additional information

Publisher's note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

The views expressed are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or management.

Appendix

Appendix

See Tables 5, 6, 7 and 8.

Table 5 Descriptive statistics
Full size table
Table 6 Hausman test for comparing fixed and random effects
Full size table
Table 7 Panel unit roots tests
Full size table
Table 8 Panel cointegration test results
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Singh, B. Housing and stock market wealth effects in developing economies. Int Econ Econ Policy 19, 29–49 (2022). https://doi.org/10.1007/s10368-021-00510-9

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-021-00510-9

Keywords

JEL Classification

Search

Navigation