COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1459

Household Reaction to Changes in Housing Wealth

Robert J. Shiller

April 2004

It is widely claimed that housing wealth, as well as stock prices, have an impact on consumption and hence on aggregate economic activity. This paper presents a broad overview of the issues that arise in evaluating this claim in the context of recent research in behavioral economics. Particular attention is paid to a model of the response of consumption to wealth components produced by Christopher Carroll [2004].

Keywords: Wealth effect, home prices, stock prices, consumption, saving, life cycle theory, interest rates, inflation, bubble

JEL Classification: E21