August 11, 2011
A Huffington Post piece hugely overstated the size of the stock wealth effect. It told readers that:
“According to a research note from J.P. Morgan Chase earlier this year, every 100-point drop in the S&P 500 index translated to a $1 trillion loss in household wealth, and a 1.5 percent drop in consumption.”
While this may accurately represent the research note (no link is provided), this is far out of line with the findings of a large literature on the stock wealth effect. With total consumption at more than $10 trillion, a 1.5 percent decline implies a drop of $150 billion. This would imply a stock wealth effect of 15 percent. Most of the literature has found a stock wealth effect in the range of 3-4 percent, usually with considerable lags.
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