FEATURE - OVERVIEW
Consumption: what’s wealth got to do with it?
- With the cash cushion that was built during the pandemic losing its fluff, it is a good time to revisit consumption behavior, which is starting to lose steam in Europe and. The wealth effect is a behavioral economic theory that suggests that asset-price fluctuations affect household spending. However, we find that the income effect overshadows the wealth effect in , , Spain and. The marginal propensity to consume (MPC) per 1% difference in disposable income is 0.21% for , 0.71% for , 0.78% for Spain and 0.35% for . This highlights the importance of supporting household income as a tailwind to attain the much-desired economic soft landing.
- However, the wealth effect of housing prices clearly dominates that of stock market prices almost by a factor of ten in , , , Spain and . For continental Europe, keeping inflation at bay holds the answer to consumption, while in the prospect of diminishing wealth weighs on the Fed’s hopes for a stormy soft landing.