Econometric policy evaluation: A critique

This paper studies the role of f luctuations in the aggregate consumption‐wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these f luctuations in the consumption‐wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption‐wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption‐aggregate wealth ~human capital plus asset holdings! ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents’ expectations of future returns on the market portfolio. UNDERSTANDING THE EMPIRICAL LINKAGES between macroeconomic variables and financial markets has long been a goal of financial economics. One reason

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Consumption, Aggregate Wealth, and Expected Stock Returns

This paper examines old and new evidence on the predictive performance of asset prices for inflation and real output growth. We first review the large literature on this topic, focusing on the past dozen years. We then undertake an empirical analysis of quarterly data on up to 38 candidate indicators (mainly asset prices) for seven OECD countries for a span of up to 41 years (1959 1999). The conclusions from the literature review and the empirical analysis are the same. Some asset prices predict either inflation or output growth in some countries in some periods. Which series predicts what, when and where is, however, itself difficult to predict: good forecasting performance by an indicator in one period seems to be unrelated to whether it is a useful predictor in a later period. Intriguingly, forecasts produced by combining these unstable individual forecasts appear to improve reliably upon univariate benchmarks.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w8180.pdf?abstractid=264434&mirid=1

Forecasting Output and Inflation: The Role of Asset Prices

Enclosed is a copy of the Board of Governors’ Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981. The Semiannual Agenda provides you with information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months, and is divided into three parts: (1) regulatory matters that the Board had considered during the previous six months on which final action has been taken; (2) regulatory matters that have been proposed for public comment and that require further Board consideration; and (3) regulatory matters that the Board may consider over the next six months.

Federal Reserve Bank of New Yorkの制定せる財務諸表様式について

C orporate takeovers have been very big business in the 1980s. The Office of the Chief Economist (OCE) of the Securities and Exchange Commission estimates that shareholders of target firms in successful tender offers from 1981 through 1986 received payments in excess of $54 billion over the value of their holdings before the tender offers. Almost $38 billion of the total was received after 1984. If we include the increased wealth of target firm shareholders resulting from leveraged buyouts, mergers, and corporate restructurings (prompted in large part by the threat of takeovers) these numbers are even larger. W. T. Grimm & Co. collects similar data for a larger sample of change-of-control transactions, including mergers and leveraged buyouts. They estimate that from 1981 to 1986 the total dollar value of the premiums over the pre-announcement price paid for securities involved in change-of-control transactions was $118.4 billion.1 Corporate restructurings have created even more

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.2.1.49

The Market for Corporate Control: The Empirical Evidence Since 1980

The second half of the 1990s has seen substantial changes in the wealth of American households, primarily owing to movements in the stock market. From mid-1994 to mid1997, the aggregate value of household sector equity holdings (including those owned by nonprofits, mutual funds, and pensions and other fiduciaries) roughly doubled, for a dollar gain of about $5.2 trillion.(1) Since then, stock market values on balance have continued to rise, but there have been massive fluctuations within a wide band; the dollar value of movements within the band--from the low in October 1997 to the recent highs--has been greater than $3.0 trillion.(2) These enormous swings in wealth no doubt have major implications for consumer spending. For this reason, the ability to measure the implications of the swings--that is, to determine their "wealth effect" on consumer resources--has grown in importance with the changing economic environment. In this article, we examine the wealth effect of stock market changes on consumption. Other things equal, an increase in the stock market makes people wealthier. In general, the wealthier people are, the more they spend. Is it possible, then, to quantify these simple truisms and come up with plausible estimates of the extent to which aggregate consumer spending in the 1990s has been supported by increased stock market wealth? Furthermore, how much would a market correction negatively affect future spending? Our answers to these questions are a bit limited. We find, as expected, a positive connection between aggregate wealth changes and aggregate spending. Spending growth in recent years has surely been augmented by market gains, but the effect is found to be rather unstable and hard to pin down. The contemporaneous response of consumption growth to an unexpected change in wealth is uncertain and the response appears very short-lived. Therefore, we conclude that forecasts of future consumption growth are not typically improved by taking changes in existing wealth into account. In the past, uncertainty about both the long-run (or trend) effect of wealth on consumption and the contemporaneous effect was of modest importance. However, in the current economy--where aggregate wealth fluctuations can be very large relative to household income, spending, and GDP--we find that the uncertainty about the size of the wealth effect also adds a considerable amount of uncertainty to one's ability to understand trends ill consumer spending, over and above the difficulty of understanding the forces behind market movements. In the next section, we briefly review changes in household sector spending, saving, and wealth, and highlight the central importance of stock market fluctuations to cyclical movements in the household balance sheet. We then turn to econometric analysis to measure the effect of a change in wealth on consumer spending. We find that a traditional specification of the consumption function gives a fairly erratic estimate of the wealth effect and may even suggest that the effect was rather small in recent years. By refining the specification and estimation of the consumption equation to reflect more rigorously current econometric concerns, we narrow the estimate somewhat, but are still left with some instability in our result. Using a more up-to-date methodology, we first establish that consumption and wealth, along with labor income, share a common trend. When asset values or labor income rises, consumption tends to rise as well, and we assess the magnitude of this boost to consumption by estimating the parameters of the shared trend--the marginal propensities to consume out of wealth and labor income. Our results suggest that these propensities are somewhat unstable over the postwar period. Nevertheless, we conclude that a dollar increase in wealth likely leads to a three-to-four-cent increase in consumption in today's economy, consistent with widely held beliefs about the long-run impact of wealth on consumption. …

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How Important Is the Stock Market Effect on Consumption

A paper presented at the April 2001 conference "Financial Innovation and Monetary Transmission," sponsored by the Federal Reserve Bank of New York.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID831069_code387943.pdf?abstractid=831069&mirid=1&type=2

Monetary Policy Transmission through the Consumption-Wealth Channel

INTRODUCTION Asset market values react to economic news and policy changes, and consumers react to changes in asset market values. The consumption-wealth channel of monetary policy spells out this mechanism: changes in monetary policy affect asset values, which in turn affect consumer spending on nondurable goods and services. This paper attempts to quantify these linked effects. After sketching the evolution of research on the wealth channel, we turn to evidence of its size from a number of large-scale econometric models. We then estimate a small, structural vector autoregression (VAR) under some identifying assumptions to provide our preferred estimates of the wealth channel. We find that evidence of an important wealth channel for monetary policy is scant. However, there is some role for a consumption-wealth channel in the large-scale models-with considerable variation as to its size. Finally, the structural VAR framework is found to show little or no sign of a consumption-wealth channel. EVOLUTION OF THOUGHT ON THE WEALTH EFFECT The wealth channel has deep roots in the literature on monetary policy and economic stabilization, reaching back at least to the earliest literature stimulated by Keynes' General Theory. Early on, Gottfried Haberler and A.C. Pigou noted that changes in consumer spending generated by countercyclical changes in the real value of the money stock could help provide an automatic stabilizing force to an economy subject to inflationary and deflationary forces (see the discussion in Gilbert [ 1982]). Subsequent work, notably by Modigliani (1944, 1963) and Patinkin (1965), elucidated the conditions needed in the money, goods, and labor markets through which this "real balance effect" could stabilize the economy at full employment.1 Other work of Modigliani and collaborators, in particular, expanded this theoretical literature on the real balance effect into a full-blown analysis of the impact of wealth changes induced by monetary policy (as opposed to the passive change in the real balances examined in the earliest literature). Modigliani's life-cycle model of consumer spending emphasized the critical role of household wealth in determining spending on nondurable goods and services (Brumberg and Modigliani 1954,1980; Ando and Modigliani 1963). Parallel to this work on the life-cycle model of consumption was the development of the Federal Reserve Board's econometric model of the U.S. economy, which specifically traced the connection between changes in monetary policy instruments and changes in asset markets (de Leeuw and Gramlich 1969; Modigliani 1971).2 Point estimates from this model (Modigliani 1971) suggest that roughly one-half of the impact of monetary policy changes on real economic activity through time periods of policy interest could be attributed to changes in spending arising from policy-induced changes in stock market values.3 Aside from the quantitative evidence, it is possible that the qualitative importance of the wealth channel for policy analysis grew during the 1970s and 1980s. In the 1960s and early 1970s, some of the most obvious impacts of monetary policy were evident through monetary policy's effects on thrift deposit inflows, mortgage lending, and homebuilding. This was an artifact of the Regulation Q ceilings on deposit rates and the illiquidity of mortgages. With the removal of deposit ceilings and the development of secondary mortgage markets, this mortgage credit channel faded as a dramatic sign of monetary policy effects. However, if the traditional econometric model evidence of a strong consumption-wealth channel remained intact, there would be obvious effects (and guideposts along the way, in the form of changes in long-term rates and stock market values) of policy changes. In the absence of particularly large monetary policy changes in recent years, specific discussion of the wealth channel of monetary transmission has diminished. …

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Monetary policy transmission through the consumption-wealth channel

Many argue that the astonishing growth in Americans' stock portfolios in the 1990s has been a major force behind the growth of consumer spending. This article reviews the relationship between stock market movements and consumption. Using various econometric techniques and specifications, the authors find that the propensity to consume out of aggregate household wealth has exhibited instability over the postwar period. They also show that the dynamic response of consumption growth to an unexpected change in wealth is extremely short-lived, implying that forecasts of consumption growth one or more quarters ahead are not typically improved by accounting for changes in existing wealth. Finally, the impact effect of a wealth shock on consumption growth, while statistically positive, is found to be uncertain. Although recent market gains have provided support for consumer spending, the authors' findings are too limited to encourage reliance on estimates of the stock market effect in macroeconomic forecasts.

How Important is the Stock Market Effect on Consumption

Analysts seeking evidence of rising inflation often focus on the movements of a single indicator - an increase in the price of gold, for example, or a decline in the unemployment rate. But simple statistical tests reveal that such indicators, used in isolation, have very limited predictive power.

Charles Steindel

Papers

How Important Is the Stock Market Effect on Consumption

Monetary Policy Transmission through the Consumption-Wealth Channel

Monetary policy transmission through the consumption-wealth channel

How Important is the Stock Market Effect on Consumption

The Unreliability of Inflation Indicators