The Interest Rate Effect on Private Saving: Alternative Perspectives
Aizenman, Joshua; Cheung, Yin-Wong; Ito, Hiro | April 2017
Abstract
Conventional logic suggests that lowering the policy interest rate will stimulate consumption and investment while discouraging people from saving, but low interest rates may also prompt people to increase their saving to compensate for the low rate of return. Using data on 135 countries from 1995 to 2014, this paper shows that a low-interest rate environment can yield different effects on private saving across country groups under different economic environments. A well-developed financial market, an aging population, and output volatility can all contribute towards turning the relationship between interest rates and saving negative. Among developing countries, when the nominal interest rate is not too low, we detect the substitution effect of the real interest rate on private saving. However, among industrial and emerging economies, the substitution effect is detected only when the nominal interest rate is lower than 2.5%. In contrast, emerging-market Asian countries are found to have the income effect when the nominal interest rate is below 2.5%. When we examine the interactive effects between the real interest rate and the variables for economic conditions and policies, we find that the real interest rate has a negative impact: i.e., income effect—on private saving if any output volatility, old dependency, or financial development is above a certain threshold. Further, when the real interest rate is below 1.5%, greater output volatility would lead to higher private saving in developing countries.
Citation
Aizenman, Joshua; Cheung, Yin-Wong; Ito, Hiro. 2017. The Interest Rate Effect on Private Saving: Alternative Perspectives. © Asian Development Bank Institute. http://hdl.handle.net/11540/7055.Keywords
Taxation
Public Debt
Local Government
Debt Management
Pension Funds
Mutual Funds
Social Equity
Financial Aspects
Fiscal Policy
Finance
Public Finance
Governance
National Budget
Budgetary Policy
Educational Budget
Public Financial Management
Financial System
Financial Statistics
Local taxation
Options
Government
Local government
Taxation
Employee pension trusts
Investment management
Investments
Multiemployer pension plans
Keogh plans
Individual retirement accounts
Pension plans
Employee pension trusts
Pension trusts
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