Overall, the available evidence suggests that changes in house prices have a more pronounced impact on consumption than equity prices. For the United States, Carroll et al (2011) report that the propensity to consume from a $1 increase in housing wealth ranges between two (short-run) and nine (long-run) cents, twice as large as that estimated for equity wealth (see also Case et al (2013)). Kim (2004) shows that in Korea the elasticity of consumption with respect to housing wealth is larger than with respect to equity market wealth between 1988 and 2003. Gan (2010) reports a significant impact in Hong Kong of housing wealth on consumption using a large panel data set of households. Case et al (2005), using annual data for 14 advanced economies, show that house prices are more important than stock prices in influencing consumption. These findings are consistent with the idea of a more permanent nature of house price changes and a larger share of housing in total wealth. Furthermore, changes in house prices also appear to have a differential impact on age groups, which is consistent with the relative importance of housing in overall financial wealth.<sup>16</sup> In addition, there is some evidence of asymmetric effects, with negative shocks to asset prices having a greater impact on consumption than positive shocks (Peltonen et al (2012)).

Recessions associated with asset price busts and recoveries accompanied by asset price booms tend to be more pronounced than those without such episodes. In particular, recessions associated with asset price busts are significantly longer than recessions without such disruptions (Claessens et al (2012), Drehmann et al (2012) and Muir (2017); Table 1B). They also result in significantly larger drops in output and correspondingly greater cumulative output losses. Given that about one third of recessions are accompanied by a house price bust, these results point again to the relevance of asset prices movements for economic activity.

# Comovement between asset prices and macroeconomic outcomes

Confirming the predictions of most general equilibrium-type models, asset prices tend to be correlated with current and future aggregate activity. Since they reflect current economic developments, both equity and house prices comove with business cycles (Table 1C). The contemporaneous correlations between house prices and output, however, tend to be higher than those between equity prices and output while the definitions of asset price cycles affect their correlations with the real sector.

Being forward-looking variables, equity prices provide the market’s aggregated views of future economic prospects. Empirical evidence for advanced economies confirms that changes in equity prices tend to lead output growth by a few quarters (Table 1C). The channel appears to run through investment. Indeed, for a wide variety of countries, including EMEs, equity prices seem to be better leading indicators of investment than GDP or consumption (Aylward and Glen (2000)). However, linkages between asset prices and activity also depend on countryand market-specific features (for reviews focusing on the predictive power of asset prices, see Stock and Watson (2003) and Cochrane (2008)).

consumers, implying that their consumption is quite sensitive to transitory shocks to income. Mian et al (2013) estimate the MPC out of housing wealth using US households data and find that more leveraged and poorer households suffer higher losses in consumption in response to changes in housing wealth. Some earlier studies also examine the interactions between house prices and the real economy across countries (Borio et al (1994), Kennedy and Anderson (1994) and Tsatsaronis and Zhu (2004)). 16 Research documents that house prices have a stronger impact on the consumption of older, less indebted households (see Campbell and Cocco (2007), Calomiris et al (2013) and Attanasio et al (2011)).

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