The Asymmetric Wealth Effect: Evidence from Stock Market Crashes and Retail Consumption in Indonesia

This paper investigates the dynamic transmission of stock market wealth shocks to household consump tion in Indonesia, a large emerging market economy, over the period 2019–2025. Using a novel four-step methodological framework combining GARCH(1,1) shock extraction, cointegration analysis, error correc tion modeling, and VECM-based impulse response functions, we establish several key findings. First, the wealth effect exhibits a significant two-month lag, with an 8% market crash reducing retail sales growth by approximately 5.9% after 60 days. Second, the transmission mechanism is threshold-dependent: only extreme shocks exceeding 1.5 standard deviations trigger consumption responses, while normal volatility proves insignificant, suggesting a non-linear “panic trigger” mechanism. Third, the adjustment speed is sub stantial, with 37.4% of disequilibrium corrected monthly and a shock half-life of just 1.48 months. Fourth, the response is asymmetric: crashes significantly depress consumption, while booms show no statistical im pact, consistent with loss aversion frameworks. Our findings challenge conventional consumption smooth ing models and suggest that sentiment-driven precautionary motives dominate the wealth effect channel in emerging markets. Policy implications include a two-month intervention window before consumption bottoms out following market crashes.