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The Interest Rate Effect on Private Saving: Alternative Perspectives

Joshua Aizenman, Yin-Wong Cheung and Hiro Ito

No GRU_2019_004, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

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.

JEL-codes: F3 F31 F32 F36 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019-01-25
New Economics Papers: this item is included in nep-cna
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Published in Journal of International Commerce, Economics and Policy, Volume 10 (1)

Downloads: (external link)
https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232019-004%20Cheung.pdf (application/pdf)

Related works:
Journal Article: The Interest Rate Effect on Private Saving: Alternative Perspectives (2019) Downloads
Working Paper: The Interest Rate Effect on Private Saving: Alternative Perspectives (2016) Downloads
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