Saturday 25 February 2017

Brendan Keenan: The 'wealth effect' plays out in our minds but affects the real world

What goes up must go down, so how will that affect Ireland now?

Brendan Keenan

Brendan Keenan

REMEMBER the "wealth effect"? This was a very fashionable item of analysis during the boom. People were becoming more wealthy as the value of their houses and (particularly in the US) their shares, rose rapidly.

The question was to what extent this encouraged them to spend, thereby adding to the marvellous circle of growth.

The other, more troubling, question was what would happen to consumption if that wealth began to fall? If growing wealth added to personal spending and economic growth, it seemed logical that a decline would have the opposite reinforcing effect.

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