Finance and Economics Discussion Series (FEDS)
July 1997
The Effect of Interest-Rate Changes on Household Saving and Consumption: A Survey
Douglas W. Elmendorf
Abstract:
Direct estimates of the interest elasticity of saving suffer from several serious problems. As an alternative, this survey uses an indirect approach that combines models of individual behavior with estimates of certain features of individuals' preferences. The paper examines the effect of interest-rate changes on the consumption and saving of people who follow the lifecycle model, who plan to leave bequests, who save to reach a fixed target, and who have short planning horizons.
It is not possible to provide a precise estimate of the interest elasticity of saving with any confidence. Nevertheless, the models that likely describe the behavior of the people who account for most of aggregate saving imply positive elasticities, so the aggregate interest elasticity of saving is probably positive.
Full paper (884 KB Postscript)Keywords: Consumption, saving, interest elasticity
PDF: Full Paper
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