The Interest Rate Effect on Private Saving : Alternative Perspectives

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

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Original languageEnglish
Article number1950002
Journal / PublicationJournal of International Commerce, Economics and Policy
Volume10
Issue number1
Early online date8 Feb 2019
Publication statusPublished - Feb 2019

Abstract

Lowering the policy interest rate could stimulate consumption and investment while discouraging people from saving. However, such a move may also prompt people to save more to compensate for the low rate of return. Using the data of 135 countries from 1995 to 2014, we show that a low interest rate environment can yield different effects on private saving under different economic environments. The real interest rate affects private saving negatively if output volatility, old-age dependency, or financial development is above a certain threshold. Depending on a country's specific economic circumstances, these effects are significant for the economy - a four-percentage point decline in the real interest rate, which is approximately the same as one standard deviation for China, would lead to a 1.52 percentage point increase in the Chinese private saving rate. Further, when the real interest rate is below 1.1%, greater output volatility would lead to higher private saving in developing countries.

Research Area(s)

  • financial development, Income effect of interest rate, old-age dependency, output volatility, substitution effect of interest rate