Working Paper: NBER ID: w3040
Authors: Eytan Sheshinski; Vito Tanzi
Abstract: A sharp increase in the real interest rates in the U.S. in the 1980s was expected to induce a higher personal saving rate. Actually, between 1981 and 1983 the personal saving rate fell from 7.5 percent to 5.4 percent and for the 1985-1988 period it had averaged only 4 percent even though real interest rates have remained high. We argue that one possible explanation for this negative relation between interest rates and the personal saving rate is the large fraction of wealth, especially financial wealth, held by persons over 65 years old (this group has received more than 50 percent of all interest income in the U.S. during this period). Life cycle theory suggests, as we demonstrate, that the wealth effect created by an increase in the rate of interest reduces the savings of old persons and raises savings of the young and hence the effect on aggregate savings depends on the age distribution in the population.
Keywords: personal savings; interest rates; wealth effect; life cycle theory
JEL Codes: E21; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in real interest rates (E43) | Increase in savings of younger individuals (D14) |
| Increase in real interest rates (E43) | Decrease in savings of older individuals (D14) |
| Increase in real interest rates (E43) | Increase in consumption among older individuals (D12) |
| Increase in consumption among older individuals (D12) | Decrease in overall savings (D14) |
| Increase in real interest rates (E43) | Decrease in aggregate savings (E21) |
| Wealth effect among older individuals (E21) | Decrease in overall savings (D14) |