The International Wealth Effect : A Global Error-Correcting Analysis

This paper analyzes the empirical link between asset prices, consumption and the trade balance using a global macroeconometric model developed by Pesaran, Schuermann, and Weiner (2004) that explicitly captures each country's position within the world economy through bilateral trade patterns. The model is estimated for 29 countries with quarterly data over the period 1981Q1-2006Q4. Motivated by increasing international financial and real integration, and pronounced cycles in stock and housing prices, we employ generalized impulse response functions for a group of five of the world's most industrialized countries and show that shocks to asset prices transmit into consumption decisions and subsequently into the trade balance. We refer to this transmission channel as the international wealth effect