After reaching its peak at the year of 1987, the saving rate of Taiwan dropped quickly in the late 1980’s. At the same time, the real average housing prices in Taiwan had increased almost three times from 1987 to 1990. Why did the saving rated in Taiwan drop so quickly after 1987? Does it relate to the dramatic increase in housing prices? Though it has been confirmed that there is a negative wealth effect of housing price appreciation on savings, the estimated wealth effect on savings could be biased if the effect of mortgage payment (also known as forced savings) on saving is neglected. Applying quarterly data from 1981 to 2000
in Taiwan, we employ a time series analysis to compare two saving models, the traditional one and the one with forced saving. Our major findings include: First, as we expected, the negative wealth effect of housing price appreciation on saving is smaller in the forced saving model than in the traditional saving model. Secondly, by the estimated ECMs, ignoring the impact of housing price appreciation on forced saving, the speed of short-run adjustment in total saving would be significantly slower. Third, for forecasting purpose, the forecast errors in
ECM of the forced saving model are smaller than that in the total savings model.