Saving, Interest Rates and Finite Horizons

Nirai Alexander Tomass ()
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Nirai Alexander Tomass: Vienna University of Economics and Business, Vienna, Austria

Journal of International Commerce, Economics and Policy (JICEP), 2022, vol. 13, issue 02, 1-22

Abstract: We study the heterogeneity of interest rate effects on private saving across the age dimension. Taking income and substitution effects as given, we illustrate how in a simple life cycle model, older individuals respond less to interest rate changes than younger ones. This result is driven by the fact that older individuals have a shorter planning horizon, and consequently a lower and less interest sensitive present discounted value of future earnings. However, estimating a dynamic error components model on a global panel of countries spanning the period 1995–2014, we find that there is no evidence for there being a different interest rate effect for countries with higher old age dependency ratios. Our results stand in contrast to recent studies that find effects which are consistent with the theory.

Keywords: Life cycle saving; interest elasticity; old age dependency; dynamic error components model; jackknife bias correction (search for similar items in EconPapers)
JEL-codes: C33 E21 E43 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S1793993322500077

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