The Wealth Effect


in It's Not Over

Published in print January 2013 | ISBN: 9780198088417
Published online January 2013 | e-ISBN: 9780199082292 | DOI:
The Wealth Effect

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Chapter 5 modifies Steindl’s model to include of wealth-induced consumption of the capitalists which counteracts the tendency of underconsumption in the short run. While the tendency towards stagnation (as a result of both underconsumption and underinvestment) could exist, there are ways to inflate capitalists’ expenditure through sources outside of current demand which will help avert this problem in the short run. This external impetus can be provided by bubbles in asset price markets which generate wealth effects on capitalists’ consumption. Short run dynamics shows that if the wealth effect is stronger than the effects of underconsumption and underinvestment, the economy faces a boom which can last as long as the asset market is booming. Just the opposite would follow when the asset market goes bust. This asset market could be of any asset, including non-financial assets like housing.

Keywords: capitalists’ consumption; speculation; wealth effect; irrational exuberance; boom; asset markets

Chapter.  4106 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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