Are Wealth Effects Important for Canada?

The authors examine the link between consumption and disaggregate wealth in Canada. They use a vector-error-correction model in which permanent and transitory shocks are identified using the restrictions implied by cointegration proposed by King, Plosser, Stock, and Watson (1991) and Gonzalo and Granger (1995). This procedure allows the authors to identify the reaction of consumption to both types of shocks and to calculate average marginal propensities to consume out of disposable income, human wealth, stock market wealth, and housing wealth. The authors find evidence of a significant housing wealth effect for Canada. Conversely, the evidence regarding the stock market wealth effect is weak. In terms of policy implications, other things being equal, the analysis of future inflationary pressures would require that more weight be put on fluctuations in housing prices than on fluctuations in stock prices.