The effects of stock market movements on consumption and investment: does the shock matter?

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 26 October 2004

Working paper No. 236 
By Stephen Millard and John Power

This paper uses a simple model to examine the links between equity price movements and consumption and investment. Generally, the effect of a given movement in equity prices on consumption depends on the underlying source of the shock to equity prices, and some empirical evidence is presented that supports this. Furthermore, in the model the effect of a given movement in equity prices on investment does not depend on the source of the shock. However, some theoretical arguments and empirical evidence are provided to suggest that it might in the real world.

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