How Asset Type and Monetary Policy Shape Consumer Spending: Insights from IMF Paper

A new IMF study, with input from the Bank of England and ECB, finds that housing wealth has a significantly stronger and more persistent effect on consumption than financial wealth. The impact is amplified by accommodative monetary policy and healthy labor markets, but limited by wealth inequality.

A new working paper by the International Monetary Fund (IMF), in collaboration with economists from the Bank of England and the European Central Bank, offers a groundbreaking reassessment of the elusive “wealth effect” on household consumption. Drawing from three decades of data across 28 advanced economies, the researchers present a compelling analysis of how fluctuations in asset wealth, both housing and financial, translate into changes in consumer spending. At the heart of their investigation lies a novel empirical strategy that filters out endogeneity, isolating only exogenous wealth shocks. By doing so, the study aims to uncover a more accurate, causal relationship between asset price changes and household behavior, a critical insight in an age where housing booms, stock surges, and monetary interventions are reshaping the global economy.

Using a vector autoregression (VAR) framework complemented by structural identification techniques and forecast error analysis, the authors disentangle wealth movements that arise independently of households’ income or macroeconomic expectations. This method helps eliminate reverse causality, where increased consumption boosts asset values, and provides a clearer understanding of how unexpected wealth changes drive spending patterns. Notably, the paper finds that not all wealth is created equal: housing wealth exerts a significantly stronger and more persistent influence on consumption than financial wealth. In the medium term, the marginal propensity to consume (MPC) out of housing wealth is nearly three times that of financial assets. This gap is attributed to housing’s dual role as both shelter and investment, as well as its use as collateral for credit, which makes it more liquid and accessible for spending purposes.

Housing Wealth Packs a Bigger Punch Than Stocks

The study emphasizes the disparity between housing and financial assets in shaping consumer behavior. While both forms of wealth can raise household net worth, their consumption effects are unequal in magnitude and persistence. A one-dollar increase in housing wealth triggers a more durable increase in consumption compared to an identical rise in stock or bond holdings. The reasoning lies partly in liquidity constraints: homeowners are more likely to access credit by leveraging home equity than by liquidating or borrowing against financial portfolios, especially in countries with developed mortgage markets.

In addition, housing wealth is more broadly held than financial assets, which are concentrated among the wealthiest households. Since high-income individuals tend to save more of their wealth gains, the aggregate consumption response to financial market booms is often muted. Conversely, housing gains reach a larger segment of middle-class households, who have higher MPCs and are thus more likely to spend any increase in net worth. This distributional nuance helps explain why real estate bubbles often have greater macroeconomic spillovers than stock market rallies.

Interest Rates and Central Banks Shape the Wealth Effect

Monetary policy conditions significantly influence the strength of the wealth effect. The research shows that the impact of asset wealth on consumption is amplified when interest rates are low or at the zero lower bound, as was the case during much of the post-2008 recovery and the COVID-19 era. In such periods, accommodative monetary policy boosts both asset values and consumer confidence, thereby reinforcing the wealth-consumption link. However, when central banks operate under more reactive policy rules, tightening interest rates to control inflation or stabilize output, the wealth effect becomes less potent. These dynamics reveal how monetary authorities, often through indirect channels like forward guidance or quantitative easing, can shape consumer behavior by influencing asset markets.

The policy implication is profound: while asset-based stimulus can be an effective short-term tool in low-rate environments, it may not work uniformly across different macroeconomic contexts. Policymakers must therefore account for monetary conditions when designing interventions aimed at stimulating demand through asset channels.

Labor Market Conditions Are Critical to the Transmission

The study finds that the health of the labor market plays a pivotal role in determining whether households will spend or save their wealth gains. In times of high employment and stable income expectations, households are more inclined to translate wealth increases into immediate consumption. During downturns, even positive wealth shocks may fail to stimulate demand, as heightened uncertainty leads to greater precautionary savings and more limited access to credit. Thus, wealth shocks do not operate in a vacuum, they are filtered through the lens of employment security and economic confidence.

The findings highlight a crucial intersection between labor market dynamics and financial policy. Strengthening labor protections and ensuring robust employment may not only support social welfare but also enhance the effectiveness of wealth-driven consumption.

Inequality and Asset Ownership Matter More Than Ever

Perhaps one of the most policy-relevant aspects of the research is its focus on inequality and the distribution of asset ownership. The macroeconomic effects of wealth changes depend heavily on who holds the assets. In societies where financial wealth is concentrated at the top, asset price booms deliver limited benefits to aggregate consumption. By contrast, more inclusive ownership of housing wealth generates broader-based economic gains, as a larger number of households respond to increases in wealth by raising their spending.

This reality underscores the limitations of policies that rely solely on boosting asset prices to drive growth. The authors caution that such approaches may worsen wealth inequality while delivering diminishing returns on demand stimulus. Instead, they advocate for structural reforms aimed at democratizing asset ownership, easing credit constraints, and strengthening labor markets, all of which would increase the responsiveness of consumption to wealth changes.