Occasional Paper Series - No. 29 - Wealth and Asset Price Effects on Economic Activity

Oct 12, 2026

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Occasional Paper No. 29 (June 2005) examines whether asset prices influence real economic activity, focusing on transmission channels. The paper reviews theory and evidence on the wealth channel for consumption, then surveys empirical results on asset-price effects through wealth components and marginal propensities to consume. It further analyzes investment effects via Tobin’s Q and discusses channels such as balance sheet and confidence effects, supported by micro data, calibrated models, and aggregate time-series estimates.

LanguageEnglish

CategoryPresentations

FormatPDF

Pages66

Reading Time23 min

AccessFree to download

1 Introduction

2 Wealth Channel

2.1 A theoretical review

2.2 Some conclusions

3 Household Wealth: A Statistical Review

4 Asset Price Effects via the Wealth Channel: Empirical Evidence

4.1 Micro data evidence

4.3 Aggregate time series estimates of MPC out of wealth

4.6 Conclusions

5 Asset Prices and Investment

6 Conclusions

Appendixes

1 Comparability of equity wealth data across countries

2 The US evidence on wealth effects on consumption

3 Balance sheet channel

References

OCCASIONAL PAPER SERIES NO . 29 / JUNE 2005 WEALTH AND ASSET PRICE EFFECTS ON ECONOMIC ACTIVITY by Filippo Altissimo, Evaggelia Georgiou, Teresa Sastre, Maria Teresa Valderrama, Gabriel Sterne, Marc Stocker, Mark Weth, Karl Whelan and Alpo Willman In 2005 all ECB publications will feature a motif taken from the €50 banknote. OCCASIONAL PAPER SERIES NO . 29 / JUNE 2005 WEALTH AND ASSET PRICE EFFECTS ON ECONOMIC ACTIVITY 1 by Filippo Altissimo, Evaggelia Georgiou, Teresa Sastre, Maria Teresa Valderrama, Gabriel Sterne, Marc Stocker, Mark Weth, Karl Whelan and Alpo Willman This paper can be downloaded from the ECB’s website ( [http://www.ecb.int](http://www.ecb.int)). 1 This is the joint work of a team composed of Filippo Altissimo (ECB), Evaggelia Georgiou (Bank of Greece), Teresa Sastre (Banco de España), Maria Teresa Valderrama (Österreichische Nationalbank), Gabriel Sterne (Bank of England), Marc Stocker (ECB), Mark Weth (Deutsche Bundesbank), Karl Whelan (Central Bank of Ireland) and Alpo Willman (ECB). © European Central Bank, 2005 Address Kaiserstrasse 29 60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany Telephone +49 69 1344 0 Website [http://www.ecb.int](http://www.ecb.int) Fax +49 69 1344 6000 Telex 411 1 4 4 e cb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The views expressed in this paper do not necessarily reflect those of the European Central Bank. ISSN 1607-1484 (print) ISSN 1725-6534 (online) CONTENTS 1 INTRODUCTION 2 WEALTH CHANNEL 2. 1 A theoretical review 2.1.1 Implications of the lifetime budget constraint 2.1.2 Implications of risk aversion 2.1.3 Implications of income uncertainty 2.1.4 Do marginal propensities to consume out of different wealth components differ? 2.1.4.1 Implications of market imperfections, taxation and diversified bequest motives 2.1.4.2 Implications of the (un)predictability of asset prices 2.1.4.3 Marginal propensities to consume out of non-equity financial wealth, equity wealth and housing wealth 2. 2 Some conclusions 3 HOUSEHOLD WEALTH: A STATISTICAL REVIEW 3.1 Decomposition of household wealth into financial and housing wealth 3.2 Decomposition of household financial wealth to components 3.3 Equity wealth effect, income distribution and demographics 4 ASSET PRICE EFFECTS VIA THE WEALTH CHANNEL: EMPIRICAL EVIDENCE 4. 1 Micro data evidence 4. 2 The MPC out of wealth in some calibrated theory-based models 4 4 5 5 7 8 8 9 9 11 12 13 13 14 15 18 18 19 4.3 Aggregate time series estimates of MPC out of wealth 20 4.3. 1 MPC out of wealth based on the estimated deep parameters of the consumption function 20 4.3.2 Aggregate time-series estimate of MPC out of wealth: direct data-based approach 21 4.3.2.1 Evidence based on cross-country studies 21 4.3.2.2 Evidence based on single-country studies 24 4.4 Overview and provisos to established results 26 4.5 How significant are cross-country differences in estimated MPC out of wealth? 27 4.6 Conclusions 28 5 ASSET PRICES AND INVESTMENT 29 5.1 Equity prices and corporate investment 29 5.2 Tobin’s Q or cost-of-capital channel 30 5.3 House prices and housing investment 33 6 CONCLUSIONS 34 APPENDIXES 1 Comparability of equity wealth data across countries 37 2 The US evidence on wealth effects on consumption 40 3 Balance sheet channel 45 REFERENCES 52 ECB Occasional Paper No. 29 3 4 1 INTRODUCTION Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. The macroeconomic importance of this phenomenon is illustrated by Figure 1, which presents stock market capitalisation as a percentage of GDP in some

FAQs

What question does the paper address about asset prices and economic activity?

The paper asks whether asset prices affect real activity, motivated by large surges and subsequent retreats in asset values in the late 1990s and early 2000s.

Which main transmission channels are considered for stock prices?

Four channels are discussed: the wealth effect on consumption, the Tobin’s Q effect on investment, the balance sheet effect on private spending via the credit channel, and the confidence effect.

How does the paper summarize evidence on consumption from the wealth channel?

It reviews empirical evidence using micro data, calibrated theory-based models, and aggregate time-series estimates of the marginal propensity to consume out of wealth.

Oct 12, 2026

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