Policy Uncertainty and Precautionary Savings: Does a Possible Reduction of the Mortgage Interest Deduction Increase Savings in the Netherlands?

22 Pages Posted: 12 Aug 2015

See all articles by Mauro Mastrogiacomo

Mauro Mastrogiacomo

De Nederlansdche Bank (DNB); Vrije Universiteit Amsterdam, School of Business and Economics

Raun van Ooijen

University of Groningen

Date Written: October 31, 2014

Abstract

We analyze whether uncertainty related to the outcome of future policy results in precautionary saving. We focus on an important cause of policy uncertainty for households in the Netherlands: the possible limitation of the mortgage interest deduction. To isolate the effect of policy uncertainty on saving we survey participants in the Dutch CentERpanel. We elicit the subjective distribution of house prices in both a policy neutral scenario and a realistic but simplified reform scenario. We find that the subjective measures of house price uncertainty contain useful information and that households do recognize both aggregate house price uncertainty and policy uncertainty. Households who are more uncertain about aggregate house price movements (ceteris paribus) save more than households who are less uncertain. We also find that policy uncertainty alone increases precautionary saving. We discuss that a reform that is not credible could ex post exacerbate rather than mitigate precautionary saving which leads to an additional welfare loss.

Keywords: Precautionary savings, income uncertainty, mortgage interest policy reform

JEL Classification: D12, D91, E21

Suggested Citation

Mastrogiacomo, Mauro and van Ooijen, Raun, Policy Uncertainty and Precautionary Savings: Does a Possible Reduction of the Mortgage Interest Deduction Increase Savings in the Netherlands? (October 31, 2014). Netspar Discussion Paper No. 10/2014-091, Available at SSRN: https://ssrn.com/abstract=2642744 or http://dx.doi.org/10.2139/ssrn.2642744

Mauro Mastrogiacomo

De Nederlansdche Bank (DNB) ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31(0)20 444 6037 (Phone)
+31(0)20 444 6004 (Fax)

Raun Van Ooijen (Contact Author)

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

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