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The Interest Rate Effect on Private Saving: Alternative Perspectives

Author

Listed:
  • Joshua Aizenman

    (Department of Economics, University of Southern California)

  • Ying-Wong Cheung

    (Department of Economics, City University of Hong Kong)

  • Hiro Ito

    (Department of Economics, Portland State University)

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.

Suggested Citation

  • Joshua Aizenman & Ying-Wong Cheung & Hiro Ito, 2019. "The Interest Rate Effect on Private Saving: Alternative Perspectives," GRU Working Paper Series GRU_2019_004, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2019_004
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232019-004%20Cheung.pdf
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    References listed on IDEAS

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    Cited by:

    1. Yin-Wong Cheung & Sven Steinkamp & Frank Westermann, 2020. "A Tale of Two Surplus Countries: China and Germany," Open Economies Review, Springer, vol. 31(1), pages 131-158, February.
    2. Felici, Marco & Kenny, Geoff & Friz, Roberta, 2023. "Consumer savings behaviour at low and negative interest rates," European Economic Review, Elsevier, vol. 157(C).
    3. Michael G. Arghyrou & Maria Dolores Gadea, 2019. "Private bank deposits and macro/fiscal risk in the euro-area," CESifo Working Paper Series 7532, CESifo.
    4. Mirpourian, Mehrdad, 2020. "A Gendered Look at Savings Behavior among Nigerian Microsavers," MPRA Paper 103221, University Library of Munich, Germany.
    5. Philemon Kwame Opoku, 2020. "The Short-Run and Long-Run Determinants of Household Saving: Evidence from OECD Economies," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 430-464, September.
    6. Artemis Stratopoulou, 2023. "Assessing the Effects of Capital Account Liberalization on Savings," Open Economies Review, Springer, vol. 34(5), pages 1107-1170, November.
    7. Renáta Pitoňáková, 2018. "Private Sector Savings," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 1-17, March.
    8. Philemon Kwame Opoku, 2019. "The Short-Run and Long-Run Determinants of Household Saving:Evidence from OECD countries," Working Papers REM 2019/0110, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. Mirpourian, Mehrdad, 2020. "A Gendered Look at Savings Behavior among Nigerian Microsavers," MPRA Paper 103062, University Library of Munich, Germany.
    10. Philemon Kwame Opoku, 0. "The Short-Run and Long-Run Determinants of Household Saving: Evidence from OECD Economies," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 0, pages 1-35.
    11. Ondřej Badura, . "Interest Rates and Household Saving Behaviour: An Empirical Puzzle and a Solution Using Czech Data," Prague Economic Papers, University of Economics, Prague, vol. 0.
    12. repec:bla:pacecr:v:23:y:2018:i:1:p:8-26 is not listed on IDEAS
    13. Angrick, Stefan & Nemoto, Naoko, 2017. "Central Banking below Zero: The Implementation of Negative Interest Rate Policies in Europe and Japan," ADBI Working Papers 740, Asian Development Bank Institute.
    14. Klaas Staal, 2023. "Household Savings and Negative Interest Rates," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 29(1), pages 1-13, May.
    15. Manuel Rupprecht, 2020. "Income and wealth of euro area households in times of ultra-loose monetary policy: stylised facts from new national and financial accounts data," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(2), pages 281-302, May.
    16. Ignacio Hernando & Irene Pablos & Daniel Santabárbara & Javier Vallés, 2018. "Private saving. New cross-country evidencebased on bayesian techniques," Working Papers 1802, Banco de España.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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