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

Antonio Paradiso ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Saving; ratio; MEW; VEC; asset; prices; long-term; interest; rates (search for similar items in EconPapers)
JEL-codes: C10 E21 (search for similar items in EconPapers)
Date: 2010-10-06
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:26754

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