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The Decline in Household Saving and the Wealth Effect

  • F. Thomas Juster

    (University of Michigan, Board of Governors of the Federal Reserve System, RAND)

  • Joseph P. Lupton

    (University of Michigan, Board of Governors of the Federal Reserve System, RAND)

  • James P. Smith

    (University of Michigan, Board of Governors of the Federal Reserve System, RAND)

  • Frank Stafford

    (University of Michigan)

Using a unique set of household-level panel data, we estimate the effect of capital gains on saving by asset type, controlling for observable and unobservable household-specific fixed effects. The results suggest that the decline in the personal saving rate since 1984 is largely due to the significant capital gains in corporate equities experienced over this period. Over 5-year periods, the effect of capital gains in corporate equities on saving is substantially larger than the effect of capital gains in housing or other assets. Failure to differentiate wealth effects across asset types results in a significant understatement of their size. © 2006 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.2006.88.1.20
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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 88 (2006)
Issue (Month): 1 (February)
Pages: 20-27

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Handle: RePEc:tpr:restat:v:88:y:2006:i:1:p:20-27
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