Reference-Dependent Preferences and Homeowners' Consumption Responses to Wealth Shocks

This paper examines the impact of changes in household wealth on homeowners' consumption behavior using recent panel data of Japanese households. For an average household, we find the elasticity of consumption spending with respect to household wealth to be roughly 1.0% for housing and 1.8% for financial wealth. Furthermore, we also find that homeowners' consumption responses are asymmetric; that is, the housing and financial wealth effects are substantially larger for households whose consumption is below some reference consumption level. These results are robust to a number of alternative specifications and broadly consistent with the notion that households' preferences are reference-dependent