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What caused the equity withdrawal mechanism? An investigation using threshold cointegration and error correction

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  • Antonio Paradiso
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    Abstract

    This work investigates the mortgage equity withdrawal mechanism in the US economy from an empirical perspective. Using the threshold cointegration test of Enders and Siklos (2001), which allows for asymmetric adjustment, we find a cointegrating relationship among mortgage equity withdrawal, house prices and interest rates. In particular, we find that the speed of adjustment towards equilibrium is highly persistent above the appropriate estimated threshold, namely in the presence of favourable news. This finding is consistent with the theory of habit formation (Duesenberry, 1949) and conspicuous consumption (Veblen, 1899). Furthermore, this result helps to understand the complex issue of the consumption boom of the late 1990s.

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    File URL: http://hdl.handle.net/10.1080/09603107.2012.711937
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 23 (2013)
    Issue (Month): 2 (January)
    Pages: 139-148

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    Handle: RePEc:taf:apfiec:v:23:y:2013:i:2:p:139-148

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    Cited by:
    1. Guglielmo Maria Caporale & Mauro Costantini & Antonio Paradiso, 2012. "Re-examining the Decline in the US Saving Rate: The Impact of Mortgage Equity Withdrawal," Discussion Papers of DIW Berlin 1232, DIW Berlin, German Institute for Economic Research.

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