The Capitalization of Interest Subsidies: Evidence from Sweden
Dice Center Working Paper No. 98-15
28 Pages Posted: 1 Dec 1998
Date Written: September 8, 1998
We analyze by far the most extensive data base yet employed in estimating capitalization of below-market interest rates into asset prices: nearly 300,000 sales of owner-occupied homes in Sweden from 1981 to 1993 with 40,000 including government subsidized interest rates. Our estimates indicate very clearly that interest subsidies are capitalized into house prices. The below-market financing parameter is consistently significantly negative in all model specifications, irrespective of assumptions about the degree of foresight, representation of the age structure and interest rate measure for all ten regions that we have studied. In our favored model specification the estimated capitalization coefficients center on minus unity, indicating full capitalization.
JEL Classification: G12, R31
Suggested Citation: Suggested Citation
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By James Hansen