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    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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    Citable URI
    http://hdl.handle.net/11540/7055
    Metadata
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    adbi-wp715.pdf (1.467Mb)
    Author
    Aizenman, Joshua
    Cheung, Yin-Wong
    Ito, Hiro
    Theme
    Finance
    Governance
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise