Wealth Effect – Asset Prices, Debt Burden, and Windfall Gains
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Rising Asset Prices – Positive Wealth Effect: raises consumer confidence, and real wealth increases: can sell equities, or borrow on the strength of their prices; re-mortgage houses.

Debt Burden: e.g. early 1990s – many with properties worth less than outstanding mortgage. So have to save harder to reduce debt burden. (also depresses consumer confidence.)

Windfall Gains: (1997: £35bn) mergers of building societies & their demutualisation. (Eco theory tells us that an increase in consumer’s wealth unlikely to lead to a proportionate increase in consumption, with consumer spreading consumption over lifetime – so increase in consumption likely to be relatively small.) – But 1997: larger than expected (1 explanation: liquidity constraints: people unable to borrow on strength of future income – so spend it.)

Other Notes in this Category

1. Access to credit / Financial Deregulation
2. Consumption
3. Consumption and Saving Exam Questions
4. Determinants of Consumption
5. Inflation
6. Interest Rates and Monetary Policy
7. Key Points
8. Other Theories of the Consumption Function
9. Problems with Consumption Functon
10. Unemployment/Consumer Confidence/Uncertainty
11. Wealth Effect – Asset Prices, Debt Burden, and Windfall Gains

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