Higher Return for Savers and a Path toward Higher Investment

Victor Xing

MPRA Paper from University Library of Munich, Germany

Abstract: The rise in personal saving rate following the Great Recession was an unexpected development in light of Federal Reserve’s effort to foster stronger consumer spending via ultra-accommodative monetary policies. From the perspective of some policymakers, higher saving rate exerts downward pressure on the neutral interest rate (short-term real rate r* where monetary policy is neither contractionary nor expansionary) and increases the risk of secular stagnation. Concerned over prolonged low growth and below-target inflation despite years of policy stimulus, recent proposals have advocated aggressive measures to boost demand, such as raising Fed’s inflation objective above 2%, or to discourage saving via fiscal measures. However, there are growing signs that higher saving is not an economic anomaly but a product of the very policies designed to spur growth and inflation – the public’s response to an arduous path toward saving goals with rates near the zero lower bound. From this perspective, future policies should be mindful of low rates’ diminishing returns. Instead of forcing a reluctant public to spend on the premise of substitution effect, a more normal rates regime would likely be effective to induce higher investment by aligning policy with the public’s interest to meet future obligations.

Keywords: Monetary Policy; Stimulus; Saving; Interest Rates; Quantitative Easing (search for similar items in EconPapers)
JEL-codes: E2 E4 E5 E6 G1 G2 (search for similar items in EconPapers)
Date: 2016-09-18
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:77806

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