Are the Effects of Stock Market Volatility on Consumption State Dependent?

Abstract Household wealth from the stock market is unevenly concentrated among higher-income groups, and its distribution may be affected by stock market volatility. This paper investigates the relationship between stock market volatility and consumer spending through the lens of wealth distribution, with particular attention to different monetary policy environments. Using quarterly U.S. data from 1989 to 2024 within a state-dependent econometric framework, the study finds that stock market volatility significantly increases wealth inequality and lowers real per capita spending on durable goods, nondurable goods, and services during periods of easy monetary policy. Conversely, no significant effects are found under tight monetary policy, highlighting the state-dependent nature of the volatility-consumption relationship. This state dependency indicates a nonlinear dynamic relationship between stock market volatility and consumer spending. Additionally, results show that stock market volatility has a temporary effect on economic uncertainty and a smaller impact on consumption behavior than consumer sentiment. Policy recommendations include stabilization of stock market volatility and implementing confidence-building measures to sustain consumer spending and promote steady economic growth.