Wealth Effects in Europe: A Tale of Two Countries (Italy and the United Kingdom)

January 1, 2006

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Format: Chicago

Sònia Muñoz. Wealth Effects in Europe: A Tale of Two Countries (Italy and the United Kingdom), (USA: International Monetary Fund, 2006) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates the increasing exposure of European households to risky financial assets and the consequent impact on the economy. I analyze household data for Italy and the United Kingdom, countries that differ dramatically in their financial structure and capital markets. I estimate an endogenous switching model with bivariate switching to overcome two important obstacles in this line of research, namely, the consumption Capital Asset Pricing Model Puzzle and the excess sensitivity puzzle. The results show that there are wealth effects in both countries. I find some evidence of liquidity constraints only in Italy and habit formation exclusively in the United Kingdom.

Subject: Asset and liability management, Asset prices, Capital markets, Consumption, Financial institutions, Financial markets, Income, Liquidity, National accounts, Prices, Stocks

Keywords: Asset prices, Capital markets, Consumption, Consumption behavior, Consumption capital asset pricing model puzzle, Consumption function, Consumption function equation, Consumption growth, Europe, European capital markets, Household portfolio, Income, Life-cycle model, Liquidity, Liquidity constraint, Monetary policy, Risk asset puzzle, Risky assets, Selection equation, Selectivity models, Smoothing consumption, Stocks, Switching regressions, Transmission mechanism, Utility function, Wealth effect, Wealth effects, WP

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/030
Stock No:

WPIEA2006030
ISBN:

9781451862904
ISSN:

1018-5941

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