The Interest Rate Effect on Private Saving: Alternative Perspectives

Joshua Aizenman, Yin-Wong Cheung, Hiro Ito

NBER Working Paper No. 22872
Issued in November 2016
NBER Program(s):International Finance and Macroeconomics

Using an uneven panel of 135 countries from 1995 to 2014, we investigate the link between interest rates and private saving, and focus on whether the interest rate effect is dominated by the income (i.e., negative) or the substitution (i.e., positive) effect. With the baseline estimation, we find that the real interest rate has the substitution effect on private saving only for a full-country sample and a group of Asian economies. We also examine if low real - or nominal - interest rates have any impact on the link between the real interest rate and the private saving rate. We find that among developing countries, when the nominal interest rate is not too low, we detect the substitution effect of the real interest rate on private saving. However, among industrial and emerging economies, the substitution effect is detected only when the nominal interest rate is lower than 2.5%. In contrast, emerging-market Asian countries are found to have the income effect when the nominal interest rate is below 2.5%. When we examine the interactive effects between the real interest rate and the variables for economic conditions and policies, we find that the real interest rate has a negative impact - i.e., income effect - on private saving if any output volatility, old dependency, or financial development is above a certain threshold. Further, when the real interest rate is below 1.5%, greater output volatility would lead to higher private saving in developing countries. Lastly, we find that old dependency ratios, public healthcare expenditure, and financial development have negative impacts on private saving, but such impacts in absolute values tend to become smaller as the real interest rate becomes lower.

download in pdf format
   (560 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22872

Published: Joshua Aizenman & Yin-Wong Cheung & Hiro Ito, 2019. "The Interest Rate Effect on Private Saving: Alternative Perspectives," Journal of International Commerce, Economics and Policy, vol 10(01). citation courtesy of

Users who downloaded this paper also downloaded* these:
Mendoza w22868 Macroprudential Policy: Promise and Challenges
Han and Wei w22812 International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma
Aizenman and Noy w19067 Saving and the Long Shadow of Macroeconomic Shocks
Mitaritonna, Orefice, and Peri w22852 Immigrants and Firms' Outcomes: Evidence from France
Stiglitz w22837 The Theory of Credit and Macro-economic Stability
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us