Research on the Wealth Effect of Financial Assets on Household Consumption—Discussion Based on the Mechanism of the Real Income and Liquidity Constraint

Abstract

After using the data of China Household Finance Survey (CHFS) to explore the relationship between financial assets and household consumption, this paper found that there is a wealth effect between financial assets and household consumption, that is, the higher the level of financial assets held by households, the higher the consumption. Also, this conclusion is still robust even if we chose to add intertemporal variables to the empirical model to solve the potential endogenous problem. In addition, this paper tried to propose and verify two mechanisms in wealth effect, and mechanisms are the real income and the liquidity constraint respectively. Concretely speaking, on the one hand, households can increase property income by allocating financial assets, thereby promoting household consumption; on the other hand, households can affect flexible money, thus affecting consumption. Finally, in the further heterogeneity analysis, this paper found that compared with urban households, holding more financial assets has a stronger incentive to rural household consumption.