OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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Stock Market Fluctuations and Consumption Behaviour

Some Recent Evidence

This paper examines the likely influence of recent stock market fluctuations on major OECD economies, focusing on wealth effects and consumption. After reviewing the relevant theoretical framework and available empirical evidence, consumption functions are estimated for the US including the influence of financial wealth. The resulting estimates of the marginal propensity to consume out of financial wealth are extrapolated to other G7 countries, allowing for differences in stock market capitalisation, and compared with ones obtained more directly from consumption functions that include stock market prices as an explanatory variable. Simulations are then carried out to assess the potential world impact of a major fall in stock market prices in the G7 countries using a version of the OECD INTERLINK model which embodies the latter equations. The overall effects are found to be significant, particularly when relevant international linkage mechanisms are taken into account ...


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