Aggregate Consumption and the Stock Market: Should We Worry about Non-linear Wealth Effects?

The linkage between stock market and aggregate consumption has been extensively studied in the context of linear econometric models. This paper proposes a less restrictive approach: short-run dynamics in US consumption are analysed applying semi-parametric techniques to a large sample of monthly data (1967-2002). This allows a rigorous assessment of the claim that consumers react differently to negative and positive changes in the value of their portfolios, or that they are only sensitive to 'large' equity price corrections. The data display indeed non-linearities of this type, but their significance is modest; the results corroborate the traditional view that, overall, Wall Street is not a major concern for American households.