An Assessment of Housing and Financial Wealth Effects in Spain: Aggregate Evidence on Durable and Non-durable Consumption

Recent developments in housing and financial markets have led to fresh interest in the empirical evidence on wealth effects on consumption. This paper aims at providing up-to-date estimates of wealth effects by using a vector error correction model (VECM) approach to account for endogeneity and allow for the possibility of more than one variable equilibrating the system, in the same vein as previous work by Lettau and Ludvigson in the US. The breakdown of wealth into its housing and financial components leads to additional possibilities of adjustment to reach the long run equilibrium. In addition, the model accounts for potentially different values of the parameters linking consumption and wealth when distinguishing between durable and nondurable goods.