RDP 2006-07: Household Saving and Asset Valuations in Selected Industrialised Countries 4. Conclusion

This paper presents a framework in which asset price movements and household saving out of income could be linked, and an empirical investigation to gauge the importance of asset valuation changes as a substitute for traditional (that is, national accounts) household saving in English-speaking developed countries (Australia, Canada, the UK and the US) over the past 30 years. To this end, a common model is applied to these economies for which declines in saving over this period appear to have been largest, and institutional and cultural factors are likely to be relatively homogenous. Quarterly estimation indicates that in these countries, gains in house prices seem to have substituted for traditional saving more so than gains in equity prices, and that in some cases these effects may have increased through time. Increasing debt ratios have generally been associated with lower saving, consistent with liquidity constraints becoming less important with financial innovation. All in all, it would appear that in these countries over recent years, ‘active’ saving (that is, through traditional means of setting aside a portion of current income) has been increasingly supplanted by ‘passive’ saving (that is, using valuation gains, either realised or unrealised) as a means of accumulating wealth.