In a recent paper (“A Primer on the Economics and Time Series Econometrics of Wealth Effects,” 2001), Davis and Palumbo investigate the empirical relation between three cointegrated variables: aggregate consumption, asset wealth, and labor income. Although cointegration implies that an...

Both textbook economics and common sense teach us that the value of household wealth should be related to consumer spending. At the same time, movements in asset values often seem disassociated with important movements in consumer spending, as episodes such as the 1987 stock market crash and the...

We investigate a consumption-based present value relation that is a function of future dividend growth. Using data on aggregate consumption and measures of the dividend payments from aggregate wealth, we show that changing forecasts of dividend growth make an important contribution to...

Paper for a conference sponsored by the Federal Reserve Bank of New York entitled Financial Innovation and Monetary Transmission

The standard, representative agent, consumption-based asset pricing theory based on CRRA utility fails to explain the average returns of risky assets. When evaluated on cross-sections of stock returns, the model generates economically large unconditional Euler equation errors. Unlike the equity...