Chapter

Wealth Effects<sup>*</sup>

Amitava Bose

in Dimensions of Economic Theory and Policy

Published in print October 2011 | ISBN: 9780198073970
Published online September 2012 | e-ISBN: 9780199081615 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780198073970.003.0009
Wealth Effects*

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The recent global financial crisis, triggered by a decline in housing prices, has drawn attention to a controversial issue: the importance of ‘wealth effects’ in macroeconomics. This chapter explores this debate by analysing the effects of changes in prices of financial and real assets in an explicit intertemporal general equilibrium framework. It describes a multi-period model in which the value of a stock of wealth is the present value of the income stream that flows from it. Hence, the income effect of a static theory becomes the wealth effect of intertemporal economics. In addition, the chapter looks at some well-known debates such as the ‘Patinkin Real Balance Effect’ (RBE) and the ‘Pigou effect’ and discusses the liquidity trap, RBE in the overlapping generations model with money and capital, RBE in the representative agent model, bonds and capital goods, and housing wealth.

Keywords: wealth effects; macroeconomics; prices; multi-period model; income; intertemporal economics; Patinkin Real Balance Effect; Pigou effect; housing wealth; capital goods

Chapter.  6835 words.  Illustrated.

Subjects: Microeconomics

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