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We build a panel of 14 emerging economies to estimate the magnitude of wealth effects on consumption. Using modern econometric techniques and quarterly data, we show that: (i) wealth effects are statistically significant and relatively large in magnitude; (ii) stock market and housing wealth effects are, generally, smaller for Latin American emerging markets; and (iii) housing wealth effects have substantially increased for Asian emerging economies in recent years. Additionally, while housing wealth effects are more important in countries with low level of financial development or low income level, financial wealth effects are stronger for countries with high stock market capitalization.

Household consumption is affected not only by income (Mallick, 2008), but also by wealth such as real estate and stock ownership (Sousa, 2010a). When real estate or stock prices rise, the wealth of homeowners or shareholders increases and household consumption can rise even when labor income remains constant. Such rise in consumption due to the increase in real estate prices is called housing wealth effect, whereas the rise in consumption that is due to the increase in stock market prices is called stock market wealth effect. There is a large body of literature that studies the effect of asset price fluctuations on private consumption and authors have used different econometric techniques (such as panel versus single equation models) and databases (like micro panel data and aggregate time series) to address the issue. More recently, interest in the topic has regained ground against the background of the strong linkages between the macroeconomy (in particular, private consumption) and the wealth dynamics, which has led to concerns by numerous academics, central banks and governments about the potential implications of downturns in housing and equity prices (Sousa, 2010b). Despite the wide range of studies, most of the empirical evidence refers to advanced economies and mostly to the United States, where data is more readily available. Extending the existing literature to assess the macroeconomic impact of asset price fluctuations in emerging markets may, therefore, be important as these economies are becoming a key engine of growth in the world economy and may play an important role in the resolution of global imbalances. In addition, since an increasingly large number of emerging market economies is becoming financially developed, their access to financial assets and the possibility to extract equity from them has also risen, hence, amplifying the potential macroeconomic impact of domestic asset price movements.1 This may, in turn, generate a de-synchronization of the business cycle (Rafiq and Mallick, 2008 and Mallick and Mohsin, 2010) or negatively impinge on the nexus between monetary stability and financial stability (Granville and Mallick, 2009, Sousa, 2010c and Castro, 2011). The importance of financial assets in emerging economies is inter alia reflected both in the rise in stock market capitalization which currently represents more than 20% of the world's stock market capitalization,2 and as a share of its domestic size which is in many cases higher than for developed economies. For real estate assets, emerging markets have been recording an important rise in homeownership rates, which are now estimated to be around 62% for Latin America and 55% for Emerging Asian urban areas. In this paper, we intend to quantify the wealth effects in emerging markets. Using a panel of 14 emerging economies, we show that wealth effects are statistically significant and relatively large: a 10% rise in housing prices leads to an increase in private consumption of between 0.28% and 0.5%; an increase of 10% in stock prices is associated with a 0.26% to 0.30% increase in consumption; and when money wealth rises by 10%, consumption increases by 0.43% to 0.54%. Additionally, the empirical findings suggest that: (i) stock market wealth and housing wealth effects are, in general, smaller for Latin American emerging markets; and (ii) housing wealth effects have substantially increased in recent years for emerging Asian economies. Among Asian countries, stock market wealth effects tend to be larger in the most developed financial markets (for instance, Singapore) while housing wealth effects are only statistically significant in the cases of Taiwan and Thailand. Finally, the results suggest that consumption growth exhibits a substantial persistence and responds sluggishly to shocks. This may be an important reason for concern – particularly, in the case of a negative downturn – taking into account that these economies have often witnessed episodes of economic, financial and currency crises. Additionally, we show that, while housing wealth effects are typically stronger for countries with low level of financial development, stock market and money wealth effects are larger in the case of countries with high stock market capitalization. Similarly, housing market wealth effects seem to be quantitatively more important for countries with low income level. All in all, these features highlight the relative importance of housing assets for households in countries with low level of financial development or low income level and the sensitivity of consumption to financial wealth for countries with high stock market capitalization. The rest of the paper is organized as follows. Section 2 reviews the existing literature of wealth effects on consumption. Section 3 presents the estimation methodology. Section 4 describes the data. Section 5 discusses the results. Section 6 provides the sensitivity analysis. Finally, Section 7 concludes with the main findings and policy implications.

In this paper, we analyze the relationship between consumption and several wealth components for a panel of 14 main emerging economies. We estimate the magnitude of the effects of stock market wealth, housing wealth, and money wealth on private consumption using modern panel data econometric techniques. Drawing upon quarterly data, we show that wealth effects are statistically significant and relatively large: a 10% rise in housing prices leads to an increase in private consumption of between 0.28% and 0.5%; an increase of 10% in stock prices is associated with a 0.26% to 0.30% increase in consumption; and when money wealth rises by 10%, consumption increases by 0.43% to 0.54%. Additionally, the empirical findings suggest that: (i) stock market and housing wealth effects are, in general, smaller for Latin American emerging markets; and (ii) housing wealth effects have substantially increased for Asian emerging economies in recent years. These results are robust to the use of different econometric methodologies. Among Asian countries, stock market wealth effects tend to be larger in the most developed financial markets (for instance, Singapore). Moreover, housing wealth effects are particularly important in Taiwan and Thailand. Splitting the sample according to the level of financial development and the level of income, we also find that: (i) housing wealth effects are particularly relevant for countries with low stock market capitalization; (ii) financial and money wealth effects are quantitatively larger in the case of countries with high level of financial development; and (iii) consumption is more sensitive to changes in housing wealth when the income level is low. Finally, our results suggest that consumption growth exhibits a substantial persistence and responds sluggishly to shocks. This may be an important reason for concern – particularly, in case of a negative downturn –, given that these economies have often witnessed episodes of economic, financial and currency crises.