I am reading: Did France Cause the Great Depression

Did France Cause the Great Depression - Doug Irwin (2010)
 

I am reading: Would a stock market drop affect consumption?

Wealth and Consumption: Would a Stock Market Drop Really Cause a Recession - Stephen Cecchetti (2000)

A few facts 1990-2000

• US household wealth doubled to $44 Trillion
  
• the value of the stock market increased 300%
• household consumption increased 60% to $6.2 Trillion
• the ratio of savings to disposable income fell from 7.8% to 2.4%

Cecchetti notes that post 1995 the ratio of consumption to wealth dipped below the normal range of 17-21%. By 2000 from the perspective of a consumption to wealth ratio people were consuming as though the stock market were 25% lower that it actually was. This may have been due to a time lag to adjust consumption or uncertainty about the state of the stock market. He hypothesizes that a 25% drop in the stock market should have little impact on consumption - unless it generated a panic.

I am reading: Aggregate wealth and aggregate consumption

The Wealth Effect in Empirical Life-Cycle Aggregate Consumption Equations - Mehra (2001)

main results (approximately):

• cointegration / error correction model.
• in long run a $1 increase in annual disposable income -> $0.55 increase in annual consumption.
  
• in long run a $1 increase in wealth -> $0.04 increase in annual consumption

These are not stunning revelations as they confirm previous results. However it is something to think about given the size of the swings in the stock and housing markets that we have experienced over the last decade.