The Long-run and Short-run Effects of Stock Market Wealth on Consumption

This paper investigates the long-run and short-run effects of stock market wealth on consumption using Korean time-series data. Empirical results suggest that there is a significant correlation between stock market wealth and consumption in both the long-run and the short-run. Cointegration test result reveals that there is a stable long-run relationship between stock market wealth and consumption. Estimation outcome of the error correction model also indicates that stock market wealth is significantly and positively correlated with consumption in the short-run. The short-run elasticity of consumption to stock market wealth is estimated around 0.03, which is smaller than that of previous studies such as Kim, Moon (2001) and Kim, Lee (2008). Empirical result of this paper, thus, suggests that the stock market wealth effect in Korea is valid both in the long-run and the short-run, but the magnitude of the stock market wealth effect tends to be smaller than previous empirical studies using Korean time-series data.