The Week

Doug Henwood dhenwood at
Sun Apr 30 13:08:13 PDT 2000

michael at wrote:

>It may well be that boom in one location requires recession elsewhere.
>Everyone cannot be a net exporter and booms now seem to be associated with
>exports -- the exception being the US with the unsustainable wealth effect
>-- which Doug questions.

The inflow of capital into the U.S. has allowed for personal and corporate borrowing. I'd say those inflows, rather than the wealth effect, are responsible for keeping the U.S. expansion going so far so long. And insofar as the inflows have pushed the stock market higher, they're the cause of the wealth effect, if such a thing even exists.

It's not me who questions the wealth effect; see:

Poterba, James M., and Andrew A. Samwick (1995). "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity 2, pp. 295-372 [which argues that stockholdings are too concentrated to have much of an effect on consumption, even luxury consumption]


Ludvigson, Sydney, and Charles Steindel (1999), "How Important Is the Stock Market Effect on Consumption?," Federal Reserve Bank of New York Economic Policy Review, July <> [which answers the question with a "hard to say"]


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