Long-term interest rates, asset prices, and personal saving ratio: Evidence from the 1990s

Antonio, Paradiso (2010): Long-term interest rates, asset prices, and personal saving ratio: Evidence from the 1990s.

Abstract

This article investigates the personal saving ratio in the US economy in the last two decades. We examine whether the mortgage equity withdrawal (MEW) mechanism – the cash out from refinancing home mortgage conditions – is useful for explaining the saving ratio’s declining pattern. Empirically, we find that MEW depends on house price inflation and mortgage rates. We construct a VEC model among the two variables explaining MEW, the saving ratio and the stock price. We obtain a significant cointegrating relationship. We then estimate a structural form imposing restrictions, suggested by theoretical or empirical literature, on the long-run impact matrix. We find a negative response of the saving ratio to positive shocks in asset prices, whereas there is an opposite effect in the case of a positive shock in mortgage rates, according to the theoretical expectations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Saving ratio MEW VEC asset prices long-term interest rates
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

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