This article focuses on the effect of household wealth on the euro area economy and its four largest countries. There is abundant literature on wealth effects in the United States and other individual countries which has produced a wide range of estimated elasticities of private consumption to wealth. The potential importance of household wealth has led to a rich theoretical and empirical literature on its effects on private consumption. Therefore, it is important to consider levels of and changes in wealth when determining the appropriate monetary policy stance. In turn, monetary policy may have an impact on wealth developments, not only via its impact on asset prices but also through transmission channels. As private consumption is by far the largest contributor to total economic activity, household wealth may have a substantial impact on the state of the economy and, ultimately, on the outlook for inflation. Together with future expected labour income, it determines the level of life-long resources available to households. ![]() Moreover, the level of household wealth is an important factor driving longer-term consumption choices and growth. Increases in wealth can affect private consumption in the short run, as households may feel richer and become more confident. Household wealth is the difference between the value of a household’s assets and the value of its liabilities and is one of the key determinants of private consumption. Published as part of the ECB Economic Bulletin, Issue 1/2020. Prepared by Gabe de Bondt, Arne Gieseck and Mika Tujula Household wealth and consumption in the euro area
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