Wealth Effects in Europe: A Tale of Two Countries (Italy and the United Kingdom)

Author/Editor:

Sònia Muñoz

Publication Date:

January 1, 2006

Electronic Access:

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Summary:

This paper investigates the increasing exposure of European households to risky financial assets and the consequent impact on the economy. I analyze household data for Italy and the United Kingdom, countries that differ dramatically in their financial structure and capital markets. I estimate an endogenous switching model with bivariate switching to overcome two important obstacles in this line of research, namely, the consumption Capital Asset Pricing Model Puzzle and the excess sensitivity puzzle. The results show that there are wealth effects in both countries. I find some evidence of liquidity constraints only in Italy and habit formation exclusively in the United Kingdom.

Series:

Working Paper No. 2006/030

Subject:

Asset and liability management Asset prices Capital markets Consumption Financial institutions Financial markets Income Liquidity National accounts Prices Stocks

English

Publication Date:

January 1, 2006

ISBN/ISSN:

9781451862904/1018-5941

Stock No:

WPIEA2006030

Pages:

53

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