Journal of Macroeconomics 29 (2007) 189–205 www.elsevier.

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Does wealth affect consumption? Evidence for Italy
Monica Paiella
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Bank of Italy, Economic Research Department, Via Nazionale 91, Roma 00184, Italy Received 16 July 2004; accepted 22 June 2005 Available online 8 January 2007

Abstract This paper analyzes the dynamics of Italian households’ net worth over the 1990s and assesses the strength of the wealth effects on consumption, using as a benchmark the United States. Overall, wealth effects in Italy appear to be small and unlikely to be direct. Financial wealth effects have been small because Italian households are not large scale owners of financial assets, even though their marginal propensity to consume out of financial wealth lies close to that reported for the US. By contrast, housing market effects have been small, despite widespread homeownership, because the marginal propensity to consume out of real assets is very low. Ó 2006 Elsevier Inc. All rights reserved.
JEL classification: D12; E21; E44 Keywords: Wealth effects; Household saving behavior; Housing; Financial wealth; Marginal propensity to consume out of wealth

1. Introduction The second half of the 1990s saw an unprecedented increase in household net worth in almost all industrialized countries. As a matter of simple accounting, household wealth accumulation reflects two factors: savings from current income and changes in asset valuation. In the short and medium run, changes in total wealth owe little to changes in savings (or spending) and the second factor completely dominates the first. The case of the United States clearly illustrates this point: between the end of 1995 and the end of
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First of all. through home mortgage refinancing. the marginal propensity to consume out of wealth gains accrued to retirement accounts is likely to be smaller than the marginal propensity to consume out of directly held assets. if the response in terms of consumption to a wealth shock emerges relatively quickly. rather than a cause. Further. via the ‘‘direct channel’’ that operates directly through the budget constraint.190 M. since the former are often thought of as ‘‘long-term assets’’. Traditional macroeconomic estimates suggest that. the marginal propensity to consume out of wealth is lower for households with more resources. all else equal. if wealth is not causal to consumption. Paiella / Journal of Macroeconomics 29 (2007) 189–205 1999. In principle. recent research on consumer behavior has suggested many reasons why consumers might increase their spending by less than simple calculations of the marginal propensity to consume over the life cycle suggest. the implications of a sharp correction in stock prices might differ depending on whether a price change causes revisions in the expectations of future economic conditions. If households develop ‘‘mental accounts’’ (see Thaler (1990) for details on this view) that make them more likely to consume wealth held in some way rather than others. Thus. per se. The positive relationship between consumption and wealth can also reflect the ability of asset prices. since the dramatic rise of stock market indexes of the second half of the 1990s. consequently. Distinguishing between ‘‘direct’’ and ‘‘indirect’’ wealth effects is crucial for several reasons. the impact of capital gains on spending may well be a function of whether or not the gain is realized. about the timing and nature of the ‘‘wealth effects’’ that changes in asset prices might have on consumption. then stock market fluctuations may translate into sharp changes in consumer spending. unrealized gains can be borrowed against. it remains exposed to price uncertainty. Secondly. for example. until the gain is locked in. a unit increase in wealth raises expenditure by several cents: between 2 and 6 cents on the dollar in the United States. relatively few. so that while the stock market acts as a leading indicator of consumer spending. cause changes in the latter. to predict economic activity. However. First of all. Analytic results by Carroll and Kimball (1996) and numerical simulations by Zeldes (1989) show that the consumption function becomes concave when uncertainty is introduced in the life cycle model. These estimates can be viewed as describing some trend relationship between consumption and wealth. between 1% and 3% in the euro area. if the link is not immediate and the effect takes years to develop. These swings in wealth have raised a host of questions about their implications for consumer spending. Even if the stock market wealth effect on consumption is direct. in the 1990s the importance of equity investments held in retirement accounts grew. then a decline in the stock market would be interpreted as a symptom of future slowdown in consumer spending. the rising value of stock holdings accounted for more than nine tenths of the 40% increase of households’ net worth. In fact. if the effects of rising stock market wealth on consumer spending are mainly direct. then pronounced changes in asset values may have limited impact on aggregate spending. Thus. However. beyond the basic goal of better understanding household behavior. Finally. changes in some unidentified economic factor may produce changes in both prices and consumption. the highly skewed distribution of stock ownership necessarily implies that such direct wealth effects will be small for most households. However. and especially equity prices. they convey no information about the household behavior underlying these findings and. or could induce households to finance additional expenditure by selling other assets or by reducing their marginal propensity to save out of current income. Yet. which sug- . equity values have fluctuated widely. changes in the former may not. high-income households hold equity. Finally.

all of which reduces the potential impact on consumption of stock price changes. Hence. if assets are not fungible and households develop ‘‘mental accounts’’ that dictate that certain assets are more appropriate to use for current expenditure and others for long-term saving. held basically unchanged. since property is by far the largest and most widespread component of household wealth. I find that wealth increased significantly in Italy during the second half of the 1990s. Secondly. Hence. even though their marginal propensity to consume out these assets is close to that of US households. the increases in asset prices. but remained relatively high. which concerns the possibility that the tendency to consume out of stock market wealth may differ from the tendency to consume out of other forms of wealth. taking the US as a benchmark. The evidence regarding the (small) stock market effect can be explained in at least two ways. and are harder for households to value than listed stocks. Overall. Hence. First. whatever its form. In practice though. consumers should distribute anticipated changes in wealth over time and the marginal propensity to consume out of all wealth. Saving rates fell over the decade. helps explain why the overall stock market effect on consumer spending is tiny. The rapid increases in real estate prices starting from the end of the last decade has boosted the net worth of a large group of households. where the debate on wealth effects has been most lively. who are more directly affected by stock market fluctuations. households’ marginal propensity to consume out of financial wealth is low. wealth effects in Italy appear to be small and unlikely to be direct. substantially lower than the marginal propensity to consume out of financial assets. In Italy. the vast majority enjoyed modest capital gains despite the stock market boom. During the booming years of the stock market Italian households increased . Italian households own relatively little financial wealth and their holdings of shares are small. or if they view the accumulation of some kinds of wealth as an end in itself or rather bequeath their wealth in a specific form for tax or other reasons. I find that the impact of changes in wealth on household consumption is smaller in Italy than in the United States. although comparable to that found for most other industrialized countries. In principle. those of stockowners.M. just over the real interest rate. smaller even than the financial market effects. The increase was only partly due to rising asset prices. of equity in particular. This paper provides a framework of evidence based on the Bank of Italy’s Surveys of Household Income and Wealth and financial accounts to assess the relevance of these ` issues for Italian households vis a vis the evidence available for the US. However. the degree of stock market participation and the use of stock options as a compensation. it also reflected the high rates of savings of Italian households. financial wealth effects are limited because households hold a smaller proportion of financial assets. Another interesting finding concerns the importance of housing market effects on consumption. should be the same small number. Overall. together with concavity of the consumption function and the high concentration of equity ownership at the top of the wealth distribution. had a small effect on consumption. the housing market effects on consumption also turn out to be small. This is the consequence of a financial system that is essentially bank-based. the extent and nature of wealth effects may turn out to be asset-type specific. A fairly large proportion of the shares that Italian households do own are unlisted. Paiella / Journal of Macroeconomics 29 (2007) 189–205 191 gests that the propensity to spend out of unrealized gains is likely to be smaller than the propensity to spend out of realized ones. limiting the size of the stock market. This. the marginal propensity to consume out of real assets turns out to be very low. To preview the results. These features of household behavior may help explain a related matter that has been receiving considerable attention in the literature and policy debates.

1% per year. Section 5 concludes. while that of financial assets other than equity increased by 39%. unless stated otherwise.3 trillion at the end of 1999. Real wealth effects are also relatively small because households’ marginal propensity to consume out of tangible assets is substantially lower than in the United States. US households’ real net worth increased by nearly $15 trillion.7%. while income continued a moderate upward trend. First of all. with equities yielding 5. The post-1998 rise in stock prices has increased the number of millionaires in 2000 to more than 5 million. Paiella / Journal of Macroeconomics 29 (2007) 189–205 their investments in financial assets. Household wealth and saving behavior: The US benchmark1 Between the end of 1989 and 1999. A synthetic measure of the impact of changes in wealth on consumption is given by the marginal propensity to consume out of wealth.000. Section 4 provides estimates of Italian households’ marginal propensity to consume out of financial and real wealth based on the Survey of Household Income and Wealth. Although its estimates are sensitive to the exact econometric specification and to the wealth measures included The figures reported in this section are drawn from Poterba (2000).192 M. real assets are largely illiquid as credit constraints in the form of high costs of mortgage refinancing and the lack of reverse annuity mortgage markets reduce the opportunity for Italian households to realize the capital gains on their houses and smooth their consumption. with returns averaging an astonishing 26. A review of the recent econometric evidence is also included. The relative illiquidity of housing and a preference for housing consumption (with housing generating a flow of both economic and non-economic benefits) make it more likely for households to run down their holdings of other types of more liquid assets and to accumulate their wealth in the form of tangibles to pass on to their children. Very favorable stock market returns turned many households with modest portfolios at the beginning of the 1990s into substantial wealth-holders. 2.The household sector’s stockholding grew from $3. whereas US households cashed in their gains. Over the same period the real value of tangible assets held by the household sector rose by only 14%. According to the Survey of Consumer Finances. Davis and Palumbo (2001) and Tracy and Schneider (2001). there were approximately 3 million households with net worth of at least $1 million in 1995 but nearly 4. but it finished exceptionally strong.5 million in 1998. The rest of the paper is organized as follows. almost twice the historical average of 8. 1 . The decade began modestly enough. or more than 50%. More than two thirds of the wealth expansion occurred between 1995 and 1999. The 1990s were indeed remarkably good years for US stockholders: stock returns for the decade averaged 16. the bequest motive operates strongly in Italy.3% from 1996 to 1999. The lower tendency to consume out of real wealth in Italy can be explained on at least two grounds. Section 3 turns to Italy and verifies whether the Italian data indicate the same type of ‘‘stylized facts’’ and trends that have characterized US household portfolios and consumption behavior.9% annually from 1990 to 1995. Per capita net worth at the end of 1999 was slightly more than $150. driven mainly by the exceptional performance of equity prices. Secondly. Section 2 provides descriptive evidence on the empirical facts that have fuelled the recent debate on wealth effects on consumption in the US.7 trillion at the end of 1989 to $6.7 trillion in 1995 to $13. which represents a benchmark to appraise the evidence on Italy.

As reported in Table 1.M. Maki and Palumbo show that virtually all of the observed decline in the aggregate saving rate can be attributed to a change in the Table 1 Net worth-income ratio and saving rates by income quintiles in the US Income category Net worth-income ratio 1992 Total 81–100% 61–80% 41–60% 21–40% 0–20% 4.7 6. values between 0. Recent examples of this approach.6 4.02 and 0.1 2000 6.027 0. as it requires identifying autonomous movements in share prices that are not attributable to changing expectations of future dividends or interest rates.021 0.026 0. The argument for a strong wealth effect is that this increase in the ratio of wealth to disposable income. However.4 3. As mentioned earlier. Most existing studies of consumption behavior in response to changes in wealth over the short-run are based on models of short-run dynamics that impose a long-term trend (error-correction models). leading-indicator view is Maki and Palumbo (2001) who relate the ratio of wealth to disposable income to the personal saving rate. boosted consumer spending and reduced saving relative to income.1 8. . whose estimates turn out to be quite unstable.029 0.074 0. the pattern of consumption changes following share price fluctuations should be independent of the distribution of share ownership and there is no reason to expect consumption responses from households to differ depending on whether they do or do not own shares. taken from Maki and Palumbo (2001).042 0.047 0.085 0.059 0.1 Saving rate 1992 0. the estimates of the marginal propensity to consume out of wealth do not tell us about the nature of short-run deviations from the trend relationship or about the impact of short-run fluctuations in the rate of growth of wealth on consumption.2 3. the evidence that they present tends to be inconclusive and very sensitive to the exact model specification.038 2000 0. with the estimates based on household-level data somewhat larger than those based on aggregate data.013 À0. in the US the wealth-to-income ratio rose from just below 5 in 1992 to over 6 at the end of the decade. to the time period and to the trend relationship itself. Distinguishing between the causative and the leading indicator views of the aggregate relationship between share prices and consumption is difficult. Paiella / Journal of Macroeconomics 29 (2007) 189–205 193 in the regression. are in Ludvigson and Steindel (1999) and Davis and Palumbo (2001). A recent paper investigating the issue of the causative vs.3 3.071 Note: From Maki and Palumbo (2001). Over the same span of time. the aggregate saving rate dropped from 6% to 1%. based on the Board of Governors of the Federal Reserve’s Flow of Funds and on the US Survey of Consumer Finances.07 probably represent something close to the consensus on how asset market gains affect consumer spending. Table 2.1 5. Alternative and more structural explanations of the aggregate relationship can be found by investigating household behavior on the basis of survey data. However.3 3.7 4. and of its shortcomings.3 4. primarily due to the rise in the stock market. Microeconomic data provide direct evidence on the household-level underpinnings of wealth effects and make it possible to investigate the relative importance of the direct and indirect channels in the linkage from changes in wealth accumulation to changes in saving and spending. if the leading indicator view is correct.

(2005) and Bertaut (2002).51 0.71 0.79 0. based on the US Survey of Consumer Finances. the net worth-to-income ratio rose from 3 to 4 and the saving rate.60 0. the evidence available is limited and the statistical results are variable and. which are consumed disproportionally by higher-income.76 0. In fact.81 0. Stockholders’ spending appears to be little affected by changes in wealth also according to the qualitative evidence from the University of Michigan’s SRC Survey of Consumers reviewed by Starr-McCluer (2002).48 0.5% to À2%.80 0. In the course of the past decade.47 0. based on the US Survey of Consumer Finances. Consistent with this evidence favorable to the hypothesis of a strong direct wealth effect.74 0.47 0. Boone and Girouard (2002) find that the long-run marginal propensity to con- By contrast.56 1995 0. For the rest of the population.60 0. By contrast. edged upwards. according to Case et al. at the end of the 1990s these households held more than 80% of total directly-held public equity and more than two-thirds of mutual and pension funds.74 0.53 1998 0. Attanasio et al. if anything.83 0.83 0. Other studies supporting the hypothesis of a direct wealth effect are Mankiw and Zeldes (1991).68 0. who can be expected to have benefited the most from the surge in the stock market. (2002) and Paiella (2004) who empirically appraise the Consumptionbased Capital Asset Pricing Model and find that US stockholders’ expenditure is more highly correlated with stock market returns than non-stockholders’.63 0.81 0.73 0.70 0. Paiella / Journal of Macroeconomics 29 (2007) 189–205 Table 2 Shares of assets and liabilities held by US households in the uppermost income quintile 1992 Total assets Owner-occupied real estate Checkable deposits Time and saving deposits Money market mutual funds US Treasury and agency securities Corporate bonds Listed equity Mutual fund shares Equity in non-corporate businesses Defined-contribution pension reserves Total liabilities 0. financial and non-financial wealth to be 0.72 0. as reported in Table 2.81 0.49 0.48 0.48 0.05. 2 . respectively. is larger than that of the stock market.53 Note: From Maki and Palumbo (2001). Nevertheless.50 0. whereas non-stockholders’ expenditure appears to have very little correlation with movements in stock prices.76 0.70 0.74 0.46 0. Poterba and Samwick (1995) highlight the case for an indirect channel (if any) by finding very limited correlation between stock prices and expenditure on luxury good.06 and 0.69 0. Table 1. their net worth-to-income ratio rose from above 6 to almost 9 while their saving rate declined from 8. Bertaut (2002) estimates the long-run marginal propensity to consume out of total. in the US their impact. real asset markets generally appear to have important effects on consumption and.2 Regarding the differential impacts of various forms of wealth on consumption. 0. in terms of elasticity of consumption. depend on the econometric specification. Dynan and Maki (2001) estimate stockholders’ marginal propensity to consume out of stock market wealth to be highly statistically significant. stockholding households and whose share in total consumption should therefore increase in the wake of rising stock prices. once again.80 0.1. 2propensity to save among households in the top income quintile.77 0.194 M.

variables such as wealth and saving. if stock ownership is concentrated among the households at the top of the income and wealth distribution. (1994). the database that I use stretches over a time span sufficiently long to cover a rich set of movements in asset prices. See. hence. and plenty of socio-demographic data. the latter is 0. As to the aggregate data-based evidence. a comprehensive measure of consumption. which is critical for identifying potential wealth effects. see Brandolini and Cannari (1994).3 Evidence based on aggregate data will also be offered for comparability with the ‘‘US benchmark’’ presented in the previous section. the SHIW provides detailed information on household portfolios. Further.03. Nevertheless. A source of error is the underestimation of wealth and consumption. The Survey’s wealth and income data have also been used by Guiso et al. among others. (2003). Household wealth and saving behavior: The evidence in Italy 3. Furthermore. they provide limited evidence bearing on direct wealth effects at lower frequencies. who typically account for a disproportionate share of aggregate income. (2004) who reconstruct the balance sheet of Italian households by ‘‘merging’’ the financial 3 The survey is biannual with the exception of the 1998 wave. which allow to control for differences in factors that may vary across the wealth distribution and contaminate the true relationship between wealth and spending. In addition. I use the set of estimates by Brandolini et al. As a consequence of all this. the analysis based on micro data might shed light on only a portion of the household-level underpinnings of the effect of stock market movements on the macroeconomy. (1996) and its consumption information by Miniaci and Weber (1999) and by Jappelli and Pistaferri (2000). expenditure. For a description and assessment of the survey.M. Paiella / Journal of Macroeconomics 29 (2007) 189–205 195 sume out of housing wealth is broadly similar to the marginal propensity to consume out financial wealth: the former is estimated at 0. because the most affluent grow less conscientious about completing the lengthy questionnaire as their opportunity cost mounts. A drawback is the rather limited frequency of the modules which are two or three years apart. which was run three years after the previous one. 3. like in most other microeconomic sources. saving and net worth. . The data How does Italy score on these issues? What do Italian household portfolios look like and how have they changed over the last decade? What about household saving rates? To answer these questions I use the Bank of Italy’s Survey of Household Income and Wealth (SHIW) and consider the last six surveys covering the period 1991–2002.1. especially at the top end of the income distribution. variables do not aggregate up to national accounts. The overall quality of the data has also been analyzed by Battistin et al. survey data do not fully reflect the influence of the wealthiest households. The chief advantage of individual-level data is that they allow us directly to identify the families whose wealth was most affected by the stock market boom and to determine whether their spending and saving patterns changed the most. which is necessary to determine the quantitative importance of wealth effects. which is measured residually as difference between income and consumption. for example. More importantly. tend to be measured with error. which are supposedly under-represented. The SHIW has been widely used in studies of saving behavior by Italian households. the essays in the volume edited by Ando et al.04.

Table 3 distinguishes between net saving and holding gains and relates the latter to changes in net worth. Between the end of 1989 and the end of 1999. As to household portfolio composition and its dynamics. which are likely to be over-estimated especially in periods of increasing diffusion. (2004)’s data provide accurate aggregate information on financial savings and wealth and do not suffer from the representativity problems generally affecting surveys. the years of sharpest asset price increases. Nominal amounts in billions of euros. household wealth increased by almost 2 trillion euros (at constant prices). Italian asset valuations fluctuated a lot. Equity holdings more than doubled and rose from 7% to 10% of total assets (compared with 28% in the US). the share of households with net worth of over 1 million euros tripled. while tangible assets rose over the decade in real terms by over 34% (twice as much as in the US). holding gains accounted for 50% of the increase in net worth and for almost 60% of the increase in financial assets.67 1995–1999 1040 515 890 500 525 0. rising asset prices accounted for about 64% of the increase in wealth. or by 50%.64 Note: Brandolini et al. in the financial accounts many items of the balance sheet for the household sector are determined residually by deducting the holdings of all other institutional sectors from the total.000 euros in financial assets rose fourfold.196 M. However. they do not allow us to identify the households most likely to have benefited from rising asset prices and whose consumption behavior is most likely to have been affected. that with more than 50. Based on the SHIW. Paiella / Journal of Macroeconomics 29 (2007) 189–205 accounts with the national accounts. their share in total assets fell from 64% to around 58%. in the aggregate data. These are significantly smaller shares than those recorded in the US over the same period and reflect the rates of savings of Italian households. (2004). Based on the figures reported by Brandolini et al. but during the second half of the decade stock prices tripled and towards the end also property prices rose sharply. Brandolini et al. The share of households with more than 250. Stylized facts Over the 1990s. Table 3 Savings and holding gains of Italian households 1989–1994 Change in net worth Net saving Net purchases of financial assets Net purchases of equities Holding gains Holding gains/total change in net worth 1850 610 440 180 1240 0. although per-household wealth was lower in levels. between 1991 and 2000. Using the information available on household sector saving we can infer how much of the wealth increase was due to rising asset valuations.50 1989–1999 3090 1120 1330 630 1970 0. Furthermore. The corresponding figure for the US at the end of 1999 was 23%. which have been traditionally very high. Between 1995 and the end of 1999.000 euros in directly-held equity doubled. Over the period 1989–1999. 3. . This issue appears to be particularly severe for stock holdings.2. the net worth dynamics of the household sector in Italy is comparable to that of the US. (2004) and author’s calculation.

81 – 0. The wealth-to-income ratio increased across the income distribution.50 0. The household-level data of the SHIW allow to investigate further the link between wealth accumulation and savings and the relative importance of the direct and indirect channel in the linkage from changes in wealth to changes in saving and spending.53 0. such as equity.47 0.50 0.79 0. despite having doubled over the decade. which rose from 3 to 5 times income. 6 The saving rates based on the SHIW are significantly higher than those based on the national accounts. respectively).47 1995 0. Further. as Table 4 documents.M.72 0. most markedly for those at the bottom and those at the top of the income distribution (by 60% and 30%. Taken together these elements imply that the wealthiest are likely to have enjoyed a steeper growth than the ‘‘typical’’ household.4 In Italy.8 times income in 1991 to more than 6 times income in 2000.65 0.6 households below the income median registered the sharpest drop.50 0.83 0. most of these assets remain concentrated at the top of the income distribution.5 Table 5 mimics the study by Maki and Palumbo reported in Table 1 and looks at the possible influence of wealth accumulation on consumption by relating the ratio of wealth to disposable income to the personal saving rate of the households in the SHIW. 5 Against the background of the well-known increase in financial market participation. In 2000. while the saving rates of high-income households fell slightly.47 0.54 0. Paiella / Journal of Macroeconomics 29 (2007) 189–205 Table 4 Shares of assets and liabilities held by households in the top quintile of the income distribution 1991 Total assets Real assets Real estate Financial assets Mutual funds Listed equity Non-listed equity Foreign stock and bonds Government bonds and bills Total liabilities 0. For the sample as a whole. 4 The difference in the rates of growth of aggregate wealth and of per-household wealth and in its composition can be explained by recalling that the wealthiest carry more weight in the aggregate growth rate and are underrepresented in the Survey. the top income quintile held more than 70% of listed equity.64 0. net worth rose from 4.73 0. .88 0. most financial assets appear to be heavily concentrated in the hands of few households.70 0. due to the measurement issues mentioned in the section on the data. As for saving rates. for those at the top.44 0. Over the same time period the saving rate fell 25%.46 0. The picture of household wealth dynamics and composition based on these data is just slightly different from that based on the aggregate data. but remained high.45 0. For those at the bottom of the income distribution. real assets accounted for a somewhat larger share of total assets and equity for a smaller share.50 0.47 0. the dynamics are comparable. like in the United States. 65% of mutual funds and 90% of unlisted equity versus 47% of real estate assets.47 0. the main difference in terms of portfolio composition is not so much in the split between real and financial assets as in the allocation of financial wealth: the wealthiest appear to exhibit a stronger preference for risky assets.47 0. these figures suggest that even though more households became owners of moderate amounts of equity and mutual funds.90 0.46 197 2000 0. per-household wealth at the end of 2000 was 32% higher than in 1991. most of the increase in the wealth-to-income ratio came from real assets. Nevertheless.45 0.57 Note: Bank of Italy Survey of Household Income and Wealth and author’s calculation. Overall. financial wealth also contributed significantly.76 0.

2 7. For them. have continued to save a lot and have invested heavily in stocks. However. The bottom and top 1% of the saving-to-income distribution has been dropped to reduce the impact of outliers.4 5.7 3. .t are household h’s non-durable consumption7 and (non-asset) income in period t. 4. given the low financial investments. utility-maximizing agents optimally allocate their resources to consumption over their entire life.25 0.12 À0.8 5.7 4. y h. the picture that emerges for Italy is somewhat different from that for the United States.3 2000 6.198 M.22 0. i.9 Saving rate 1991 0. income and wealth: ch. b1 is the marginal propensity to consume out of wealth.07 2000 0. These households have enjoyed sharp rates of wealth expansion and most of the capital gains on stocks.e. Households’ marginal propensity to consume out of wealth: An estimate Turning now to the question of the magnitude of the marginal propensity to consume out of wealth of Italian households.22 0.32 0. consumer decisions are conditional on human wealth (which may be assumed to be roughly proportional to labor income) and on non-human (real and financial) wealth and the equilibrium behavior of consumers can be described using the following relationship between consumption. those who have saved the most appear to be the wealthiest.5 6.8 4.4 4.02 Note: Bank of Italy Survey of Household Income and Wealth and author’s calculation. in contrast with the American wealthiest.t wh. In fact.18 0.5 5.12 0. and wh.6 5.8 5.18 0.7 1995 5.16 0.t ¼ b0 þ b1 . Some additional response to wealth gains can be expected in terms of durable good expenditure.t y h. where rational.t is its (beginning-of-period) net wealth. I estimate a simple consumption function based on the life-cycle model.33 0. Service flow measures from durable goods are not available from the SHIW. in Italy most of the increase that household wealth recorded over the past ten years is due to high savings and not just to asset value increases. durable good expenditure should not be included in the consumption measure because it represents replacements and additions to a stock. the amount expenditure would rise 7 Standard theories of consumer behavior that imply a relationship between consumption.12 1995 0. In this instance. the capital gains on financial assets are likely to have been negligible.t ð1Þ where ch. since they started the decade with the largest stock holdings. Most of the other households benefited just of the rising housing valuations. Further. However.08 À0. rather than the service flow from the existing stock. Derivations of such equation from the underlying theory of consumer behavior may be found in Deaton (1992). income and wealth apply to the flow of consumption.30 0.t and yh. Based on the evidence presented so far. Paiella / Journal of Macroeconomics 29 (2007) 189–205 Table 5 Net worth-income ratio and saving rates by income quartiles: evidence from the Survey of Household Income and Wealth Income category Net worth-income ratio 1991 Total 75–100% 50–75% 25–50% 0–25% 4.8 5. instead of cashing in their capital gains.

According to the financial and national accounts.and post-1996 dummies (Table 7) suggests that over the years the propensity to consume out of financial wealth has fallen. I split household saving based on the shares of financial and real saving in aggregate data. which would capture any factors peculiar to both the area and the time periods. 8 . total household net worth is included. Using (1) and a cross-section of data. A The results displayed in the tables are robust to the inclusion of dummies resulting from the interaction of the time and area dummies. The hypothesis of equal propensities is rejected at the 5% level of significance. Dummies for the area of residence and time dummies are also included to capture the aggregate state. As mentioned.8 Table 6 reports the results of the estimation of the regression model implied by (1). education. the share invested in financial assets rose to 90%.2%. household saving is measured as the difference between annual total income and total expenditure. compared with a marginal propensity to consume out of real wealth of 2. In the regression reported in the first column. which is directly available in the data set. To compute beginning-of-period financial and real wealth. from three quarters to four fifths of household saving went into financial assets. if there are no omitted variables representing factors that are peculiar to both the area of residence and the time period. Hence.4%. real and financial wealth are considered separately. between 1991 and 1998. after controlling for unobservable household characteristics such as differences in risk aversion or discount rates that might vary systematically across the wealth distribution and contaminate the true relationship between wealth and spending. the only source of variation left would be cross-sectional. Then. obtained by pooling the last six surveys of household income and wealth. whereas that out of real wealth has risen. The marginal propensity to consume out of financial wealth is 9. Hence.000 households. As controls. self-employment and for a household head that has moved from her region of birth to another region are included to capture unobservable heterogeneity in preference parameters that may affect both expenditure and wealth. the measure of beginningof-period wealth that I include in the regression accounts for the change in the valuation of assets occurred over the year. My estimates are based on a sample of over 42. although the difference in the pre. Dummies for stockownership. To compute beginning-of-period household wealth. Paiella / Journal of Macroeconomics 29 (2007) 189–205 199 if wealth increased by 1 euro. The results are robust to alternative ways of splitting savings. Allowing for the propensities to change over time by interacting the wealth measures by two pre.and post-1996 coefficients on wealth is not statistically significant. I can estimate consistently the long-run marginal propensity to consume out of wealth. afterwards. It is statistically significant at conventional levels and lies within the range reported by other studies for the US and for developed countries. I include in the regression a second-order polynomial in the household head’s age and household size to capture differences in expenditure and wealth related to the life cycle. which also affects consumption. any findings of a significant and positive relationship between non-durable consumption and wealth would have no implications for whether a direct wealth effect occurs in the short-run and would yield information only about the long-run. I subtract household saving from end-of-period wealth. The estimates of the marginal propensity to consume out of financial wealth are considerably larger than the figures typically implied by simple models of consumption.M. In the second. The marginal propensity to consume out of total wealth of Italian households is estimated at 4.2%.

of household members Central Italy* Southern Italy* Stockholder* High school diploma* University degree* Self-employed* Mover* Year dummies No. that the coefficient on net financial wealth is equal to that on net real wealth. over the 1990s the Italian social security system underwent important reforms.019 (0.012) À0.095) 0. of observations R-squared p-value for H0 0.187 (0. not included in the regression.018) Yes 42. the marginal propensity to The process began at the end of 1992 with a reform that substantially changed the public sector outlook for pension expenditure and reduced the projected net pension liabilities by strengthening the link between contributions and benefits.032) 0.025 (0. However.200 M.007) 0.006) 0.003) À0. The dummy ‘‘mover’’ has a value of one if the household head has moved from her region of birth to a different region.008) À0.012) À0.106 (0.0198 Note: The sample includes only those households whose head is aged between 25 and 75 and whose current nonasset income is positive.004 (0.204 (0. The decline in the marginal propensity to consume out of financial wealth could reflect a reaction to unexpected and permanent capital losses on other assets.051) À0. which may explain a reduced propensity to consume other.024 (0. although the differences are not statistically significant at the standard levels.028) À0.and post-1996 estimates.203 (0. Stockholder is a dummy equal to one if the household holds a positive amount of listed equity.008) 0. The benchmark for the area dummies is Northern Italy. A second major reform in 1995 introduced notional funding.146 (0.024) À0. possible explanation is that the sample I use for the estimation is not representative of the population as a whole (I present evidence in support of this hypothesis in Table 8).469 0. Further minor reforms were introduced in the following years and the whole process is not over yet.024) À0.113 (0.469 0.3640 0.018 (0.017) À0. Another striking feature of these estimates is the magnitude of the differences between the pre. * denotes dummy variables.062 (0.031 (0.092 (0.012) Yes 42.004 (0. the increase in the marginal propensity to consume out of real wealth may reflect the lessening of liquidity constraints that has followed financial-sector deregulation and the intensification of competition among financial institutions in credit markets. The dependent variable is the ratio of non-durable consumption to non-asset income. H0 refers to a test of the hp.016) – – À0. In particular. Paiella / Journal of Macroeconomics 29 (2007) 189–205 Table 6 The marginal propensity to consume out of wealth of Italian households I Net wealth/income Net financial wealth/income Net real wealth/income Age Age squared No.047) 0. See Attanasio and Brugiavini (2003) for an analysis of the Italian pension reform and of its effects on savings and/or consumption.030) 0.126 (0. such as financial wealth.006) 0.074 (0.3027 – II – 0.135 (0.303 (0. with pensions to be determined on a defined-contribution basis.003) À0.163 (0.039) 0.045) À0.159 (0. 9 . Robust standard errors in parentheses.287 (0. By contrast. and particularly in the mortgage markets. to a large-extent fungible/substitutable assets.042 (0.9 As a consequence of these reforms Italian households experienced a significant drop in their pension wealth.

046 (0.015) À0. for example. Out of every euro of net wealth.028 (0. of observations R-squared p-value p-value p-value p-value p-value for for for for for H0 (1991–1995) H0 (1998-2002) H1 H2 H3 0.025) 0.0667 – 0.011) À0.175 (0.025) À0. I look at the differences in the propensity to consume out of wealth across income quartiles and interact the wealth measures with two dummies that take on a value of one depending on whether the household falls in the first or last income quartile.165 (0.038 (0. that the coefficient on net real wealth is the same across the two periods considered. the households in the lowest quartile consume 5 cents.005) 0.138 (0.005) 0.083 (0.017) À0.220 (0.002) À0.040) À0.469 0.012) 0.027) À0.032) 0. that the coefficient on net financial wealth is equal to that on net real wealth. H3 refers to a test of the hp. which make Italian households less inclined to consume out of real wealth owing to. that the coefficient on net financial wealth is the same across the two periods considered.1697 Note: See Note to Table 6.011) Yes 42.M.002) À0.078) 0. of household members Central Italy* Southern Italy* Stockholder* High school diploma* University degree* Self-employed* Mover* Year dummies No. D91À95 (D98À02) is a dummy that is equal to one if the observation comes from the 1991–1995 (1998–2002) surveys. mental accounts or a preference for bequest.065 (0.012 (0.006) 0.003 (0.102 (0.287 (0.008) 0.164 (0.3291 0.096 (0.469 0.107 (0.017 (0.006) 0. H2 refers to a test of the hp.042) À0.018) À0.052) 0. The difference between the two countries could be due to differences in preferences.018 (0.012) À0.0624 0. consume out of real wealth remains substantially lower than the propensity to consume financial wealth. which is . which limit Italian households’ access to credit and thus their ability to increase their current spending by drawing down their housing equity. it could be a symptom of imperfections still affecting the financial system. Alternatively.3777 0. Paiella / Journal of Macroeconomics 29 (2007) 189–205 Table 7 The marginal propensity to consume out of wealth of Italian households: 1991–1995 and 1998–2002 I (Net wealth/income)* D91-95 (Net wealth/income)* D98-02 (Net financial wealth/income)* D91-95 (Net financial wealth/income)* D98-02 (Net real wealth/income)* D91-95 (Net real wealth/income)* D98-02 Age Age squared No. The difference is statistically significant. H0 refers to a test of the hp.289 (0.026) 0. those in the top quartile less than a cent. that the coefficient on net wealth is the same across the two periods considered.3136 – – 0. within the same period considered.156 (0.014) Yes 42.070 (0. The evidence available for the United States suggests that the US household propensity to consume real wealth is either as large or even larger than the propensity to consume financial wealth.030 (0.180 (0.019) – – – – À0. H1 refers to a test of the hp.008 (0.136 (0.3139 – – II 201 – – 0. In Table 8.033) 0.025 (0.

that the coefficient on net non-equity wealth is equal to that on real wealth.017) 0.019) À0.029 (0.0282 Note: See Note to Table 6.007) À0.012) 0.020) 0.010 (0.018) À0.028 (0.018) 0.031) À0.005) 0.046 (0.019) 0.009 (0. H3 refers to a test of the hp.009 (0.067 (0.031) 0.012) 0.052 (0.370 (0.163 (0.031) 0. For both the high.006 (0.1871 – – – – – 0.009 (0.041 (0.002 (0.055) À0.0062 – – – – II – – 0.039) À0.004 (0.0002 – – – – – – IV Stockholder – – – – 0.006 (0.004 (0.027) – À0.006) – – – – 0. H4 refers to a test of the hp.062 (0.001) 0.4096 – – 0.017) 0.043 (0.027) 0. of household members Central Italy* Southern Italy* Stockholder* High school diploma* University degree* Self-employed* Mover* Ylow* Year dummies No.0125 0.076) Yes 21.047) 0.019 (0. the high-income and the stockholders I (Net wealth/income)*Ylow (Net wealth/income)*Yhigh (Net financial wealth/income)*Ylow (Net financial wealth/income)*Yhigh Net financial wealth/income Net equity wealth/income Net non-equity wealth/income (Net real wealth/income)*Ylow (Net real wealth/income)*Yhigh Net real wealth/income Age Age squared No.062) À0.015) 0.024 (0.028) – À0.004 (0.025 (0.017) 0.066 (0. the marginal propensity to consume out of financial wealth is higher than the marginal propensity to consume out of real wealth. that the coefficient on net financial wealth is the same across the two groups considered.4517 0.025) À0. but for those in the lowest quartile the estimates are statistically different only at levels of significance greater than 5.0002 – 0. Paiella / Journal of Macroeconomics 29 (2007) 189–205 Table 8 The marginal propensity to consume out of wealth: the low-income.068 (0.016 (0.025 (0. H2 refers to a test of the hp. that the coefficient on net real wealth is the same across the two groups considered.017) Yes 2469 0.032 (0. The quartiles refer to non-asset income.039) À0.031 (0.252 0. H1 refers to a test of the hp.034 (0.034 (0.428 (0.022 (0.038 (0.030) 0.006) – – 0.007) 0.and the low-income households.008 (0.111) Yes 21.018) 0.022) À0.017) À0.0528 0.027) 0.017) Yes 2469 0.017) 0.122 (0. that the coefficient on net equity wealth is equal to that on net non-equity wealth.051 (0.031 (0.006 (0.004) À0. within the same income quartile.022) À0.018 (0.0039 – – III Stockholder – – – – 0.006) 0.040) À0.006) 0.028 (0.048 (0.039 (0.002) – – – – – – 0.004) À0. that the coefficient on net financial wealth is equal to that on net real wealth.003) – – 0.013 (0.006 (0.011 (0. Ylow (Yhigh) is a dummy that is equal to one if the household is in the first (fourth) income quartile.004 (0.086 (0. The last two columns of the table focus on the (small) sub-sample of stockowners.096 (0.041 (0. consistent with the theoretical predictions that the consumption function is concave in the presence of uncertainty.1625 0.252 0. that the coefficient on net wealth is the same across the two groups considered.029) À0.0140 0.001) 0. . H5 refers to a test of the hp.007) À0. H0 refers to a test of the hp. An implication of this finding is that since the SHIW sample excludes the richest households. my estimates of the marginal propensity to consume are likely to be larger than the average for all households.123 (0.202 M. of observations R-squared p-value p-value p-value p-value p-value p-value p-value for for for for for for for H0 (low income) H0 (high income) H1 H2 H3 H4 H5 0.052 (0.023) À0.074) 0.035 (0.001) 0.

e. given the elasticity estimates available for the United States.092 0.218 0. Italian and US household expenditure appear to be similarly affected by changes in total wealth. These figures. As a measure of the marginal propensity. and found that the marginal propensity to consume out of equity (non-equity wealth) increases (decreases) slightly with the share of savings invested. Their propensities to consume out of financial and real wealth are 2. Paiella / Journal of Macroeconomics 29 (2007) 189–205 Table 9 Calibration of the wealth effects on consumption Estimated marginal propensity (1) Total wealth Total wealth (1998–2002) Financial wealth Financial wealth (1998–2002) Real wealth Real wealth (1998–2002) 0. Sixty percent of these households are in the top income quartile. According to these rough calculations. should be treated with caution since they rely on the assumption that the consumption function is linear in wealth .175 0. I have tried different splits. Splitting financial wealth into equity and non-equity wealth.141 203 Elasticity of consumption (1) · (2) 0.8–2. it is possible to derive the elasticity of consumer spending with respect to wealth.8%. Overall.079 0. Table 9 reports the results of the calibration of the consumption response to changes in wealth using the mean of the wealth-to-consumption ratio of the households of 2002 SHIW. Going from investing 1/3 of ones’ financial savings to 2/3 raises (lowers) the estimate by 2. I take both the estimates based on all six surveys (reported in Table 6) and the estimates referred to the last three years (reported in Table 7).374 0.042 0.10 I find that the propensity to consume out of the former is substantially higher than the propensity to consume out of the latter.342 0.2%. they remain quite informative because it turns out that the elasticity is substantially more sensitive to changes in the wealth-to-consumption ratio than to changes in the marginal propensity to spend as long as the latter falls within the range of common estimates. but the differences are rather small. respectively.8% and 0.046 0.024 0. which measures the percentage-point change in expenditure from a given change in wealth.5) percentage points. The I assume that financial saving is split equally between equity and other financial wealth. A 10% increase in real wealth would have a larger effect on consumption and increase expenditure by 1.5 (0. on those households holding some of their financial wealth in publicly-traded equity.083 0. a 10% increase in total net worth would increase consumption by 3.030 Wealth-consumption ratio (mean) (2) 8.071 0. i.4%.2 cents for every 1-euro change in net worth.859 7.4%.282 Note: The mean of the wealth-to-consumption ratio has been computed as average of the individual ratios of the households interviewed in the 2002 survey.M.7–0. Multiplying the estimated propensities by the wealth-to-consumption ratio.and therefore the marginal propensity to consume is constant – and Table 8 reports quite powerful evidence against such assumption. based on back-of-the-envelope calculations. However. A 10% increase in financial wealth would increase consumption by 0. for a propensity to change consumption by 4. 10 . owing to the fact that real assets account for a larger share of Italian household consumption than financial assets.

the housing market effect on consumption is relatively small despite the extent of homeownership. Out of every euro of total net worth and of financial assets. the marginal propensity to consume out of financial assets appears to have fallen. overall. which diminished somewhat over the 1990s. Instead. the financial wealth effects are much smaller. in the United States. Thanks are due to Luigi Cannari. Irene Longhi and Cristina Ortenzi provided excellent assistance with the data. Fabio Panetta. Furthermore. which consisted mainly of real assets. who enjoyed most of the capital gains on stock and experienced the fastest growth in wealth. the Italian wealthiest continued to save at a high rate and invested heavily in equity instead of realizing their capital gains. Luigi Guiso. respectively. the marginal propensity to consume out of real assets seems to have increased. 5. most likely in response to the pension reforms of the nineties which have reduced significantly Italian households’ pension wealth. However. Paiella / Journal of Macroeconomics 29 (2007) 189–205 effect of changes in real asset prices is also similar. based on household-level data. Italian households consume around 4 and 9 cents. but remained high and well above the rates recorded in the United States. I also present estimates of the marginal propensity to consume out of wealth. Instead. possibly owing to the easing of credit constraints in the wake of deregulation and the intensification of competition among financial institutions in credit markets. reflecting Italian households’ less extensive ownership of financial asset. The analysis suggest that there have been some changes over time in household’s propensity to spend out of wealth that reflect reactions to policy changes. over the 1990s.204 M. Conclusions This paper analyses the dynamics of Italian household wealth in the 1990s and assesses the strength of the wealth effects on consumption using the evidence available for the United States as a benchmark. However. as the relatively larger consumption share accounted for by real assets in Italy offsets the differences in the marginal propensities to spend out of these assets. because. Over the past decade. Instead. Andrea Tiseno and Ignazio Visco for helpful discussion. All things considered. and in contrast with US households. The contribution of rising stock prices was limited by the composition of portfolios. in both countries equity ownership is highly concentrated among the households at the upper end of the income distribution. On the other hand. Andrea Generale. although still very low. Acknowledgements This paper is dedicated to the memory of Cristina Ortenzi. In fact. In addition to this descriptive evidence. wealth effects in Italy appear to be small and unlikely to be direct. Italian households exhibit a much lower propensity to spend out of real wealth. the dynamics of Italian household net worth over the past decade is comparable to that of US households. the rising value of stock holdings accounted for more than nine tenths of the increase in household wealth occurred in the second half of the nineties. compared with US households. These figures are comparable to the findings for the US and other industrialized countries and imply that in Italy the effects on consumption of financial asset prices are smaller only because Italian households hold relatively little financial wealth. in Italy most of the increase is attributable to the high rates of savings of households. . The views expressed are those of the author and do not necessarily reflect those of the Bank of Italy.

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