Are Wealth Effects Important for Canada?

Some analysts believe that a sharp rise in equity values was an important factor in the strong consumer spending between 1995 and 2000. Empirical evidence suggests, however, that consumer spending responds more to changes in housing wealth than it does to equity wealth. Pichette reports findings from an earlier study by Pichette and Tremblay (2003) which used a vector-error-correction model to determine the long-run relationship between various components of wealth and consumer spending. The study found that consumption does not respond significantly to a permanent increase in stock market wealth, while a permanent increase in housing wealth leads to a significant rise in consumption. These findings suggest important implications for monetary policy decision-makers, since movements in wealth will also affect aggregate demand and inflation.