Policy uncertainty and precautionary savings: Does a possible reduction of the mortgage interest deduction increase savings in the Netherlands?

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.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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