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

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  • Antonio Paradiso

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.

Suggested Citation

  • Antonio Paradiso, 2013. "What caused the equity withdrawal mechanism? An investigation using threshold cointegration and error correction," Applied Financial Economics, Taylor & Francis Journals, vol. 23(2), pages 139-148, January.
  • Handle: RePEc:taf:apfiec:v:23:y:2013:i:2:p:139-148
    DOI: 10.1080/09603107.2012.711937
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    File URL: http://hdl.handle.net/10.1080/09603107.2012.711937
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    References listed on IDEAS

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    1. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    2. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
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    Cited by:

    1. Caporale, Guglielmo Maria & Costantini, Mauro & Paradiso, Antonio, 2013. "Re-examining the decline in the US saving rate: The impact of mortgage equity withdrawal," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 215-225.

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