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

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  • Antonio, Paradiso
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    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.

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    File URL: http://mpra.ub.uni-muenchen.de/26754/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26754.

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    Date of creation: 06 Oct 2010
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    Handle: RePEc:pra:mprapa:26754

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    Keywords: Saving ratio MEW VEC asset prices long-term interest rates;

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    1. Alan Greenspan & James Kennedy, 2008. "Sources and uses of equity extracted from homes," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 24(1), pages 120-144, spring.
    2. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, Elsevier, vol. 60(1-2), pages 203-233.
    3. Massimo Guidolin & Elizabeth A. La Jeunesse, 2007. "The decline in the U.S. personal saving rate: is it real and is it a puzzle?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 491-514.
    4. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 77-128.
    5. Saikkonen, Pentti & L tkepohl, Helmut, 2000. "Testing For The Cointegrating Rank Of A Var Process With An Intercept," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 16(03), pages 373-406, June.
    6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774501, October.
    7. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 27-49.
    8. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199285679, October.
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