Wealth Effects in Emerging Economies

In this paper I estimate the impact of changes in real and financial wealth – proxied by house and stock market prices – on private consumption for a panel of sixteen emerging economies in Asia and Central and Eastern Europe. Using recent econometric techniques for heterogeneous panels, i.e. the pooled mean group estimator, inference is drawn about the long- and short-run relationship between the variables of interest. Both real and financial wealth are found to affect household consumption positively in the long-run, with the elasticity of housing wealth being greater than that of stock market wealth. When the model is run separately for the two groups of countries, the long-run impact of an increase (decrease) in house prices is generally greater in Central and Eastern European economies than in Asian ones, which make the former more vulnerable to further adverse developments in the housing market