It's called the wealth effect: People spend more when they think they're worth more.
Mr Poterba reckons the lower estimates of the wealth effect during the 1990s are more plausible.
The wealth effect explains the buoyancy of retail sales, homebuilding and the high plateau of auto volume.
Greenspan is worried about the inflationary implications of the wealth effect, but the country doesn't want to hear it.
Private consumption is picking up and will continue as the wealth effect of a stock-market bull run kicks in.
With Wall Street wobbling for much of this year, the wealth effect from share prices may be weakening too.
The other main mechanism through which falling equity prices affect the real economy is the wealth effect on consumers.
If we are going to succumb to the wealth effect, though, let's at least measure wealth in a sober fashion.
Baird, of Plante Moran, has a different view, attributing the improvement to the wealth effect, which Bernanke has actively pursued.
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The Fed's bet is that the wealth effect will trigger a virtuous cycle of confidence, investment and faster future growth.
In the short run, the danger is that the wealth effect from housing may follow the equity wealth effect by turning negative.
Moreover, financial assets now account for a larger share of household wealth, making the wealth effect of a stockmarket crash potentially much larger.
Rising stock prices have the potential to stimulate household spending due to the wealth effect, and that could raise the likelihood of economic recovery.
Optimists add that, so far, the wealth effect, under which consumers rein in spending in response to sliding share prices, has been remarkably modest.
Any rise in home prices could still increase consumption, even if it does so by removing credit constraints rather than through the wealth effect.
The wealth effect, aided by rising stock, bond, and home prices from the March 2009 lows provide further salve for the wounds of the past.
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They also have an indirect impact via the wealth effect, as consumers increase their spending in response to improvement in their balance-sheets (see article).
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Bernanke insists that the plan will stimulate investment through lower interest rates and potentially stimulate spending through the wealth effect, notwithstanding the counter-arguments stated above.
Some economists have suggested that the wealth effect may be asymmetric: falls in share prices may dampen consumption by more than rising prices boost it.
If that happens, selling will beget more selling, and falling stock prices will cut investment, consumer spending (via the wealth effect), and tax receipts.
The wealth effect that Alan Greenspan worries about, as he is paid to worry about inflation, looms as a huge stabilizing force for our domestic economy.
Also, stocks are owned by a much smaller portion of the population in China than the U.S., which means many fewer people feel the wealth effect of a rally.
In either case the weakening effect on the dollar should lift short-term earnings prospects for American exporters and the positive market response should spur consumer spending via the wealth effect.
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Even though house prices in France, Italy and Spain have risen by more than in the United States, the wealth effect on consumer spending has been smaller (see article).
Many other positive feedbacks such as the wealth effect, relative valuation methods, and the increased ability to borrow against inflated asset prices operate in financial bubbles and bull markets.
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The Fed justified its second round of quantitative easing partly on grounds that the wealth effect of rising stock prices would stimulate consumer spending and, by extension, boost output and reduce unemployment.
Moreover, the wealth effect may be asymmetric: a fall in share prices could reduce economic activity by more than a rise in prices boosts it, because of the greater adverse impact on confidence.
In a new National Bureau of Economic Research paper, the three economists argue that earlier analyses overstate the wealth effect because they do not account for the fact that people who expect to earn more in the future may bid up house prices.
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