In either case the weakening effect on the dollar should lift short-term earnings prospects for American exporters and the positive market response should spur consumer spending via the wealth effect.
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House prices have a far bigger wealth effect on consumer spending than share prices do.
First, house prices have a bigger wealth effect on consumer spending, largely because more people own their homes than own shares.
If that happens, selling will beget more selling, and falling stock prices will cut investment, consumer spending (via the wealth effect), and tax receipts.
Even though house prices in France, Italy and Spain have risen by more than in the United States, the wealth effect on consumer spending has been smaller (see article).
Too many people have made too much money, in bonds as well as in stocks, since 1994 to change their lifestyles radically just because their net worths shrivel a bit. (However, the wealth effect on consumer spending could surface if the market drops 20% or more.) Lower interest rates will help sustain consumer spending.
The authors find an effect of housing wealth on consumer spending that is both much lower than earlier research suggests and a lot smaller than the effect of changes in equity wealth.
The Fed justified its second round of quantitative easing partly on grounds that the wealth effect of rising stock prices would stimulate consumer spending and, by extension, boost output and reduce unemployment.
The Fed's explicit goal has been to lift asset prices as a way to create a "wealth effect, " which is supposed to boost consumer and business confidence.
Since the rampant stockmarket is, through its wealth effect, now a big contributor to booming consumer spending, it is hard to see demand slowing until borrowing costs rise by rather more.
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