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Saving, Interest Rates and Finite Horizons

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  • Nirai Alexander Tomass

    (Vienna University of Economics and Business, Vienna, Austria)

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.

Suggested Citation

  • Nirai Alexander Tomass, 2022. "Saving, Interest Rates and Finite Horizons," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 1-22, June.
  • Handle: RePEc:wsi:jicepx:v:13:y:2022:i:02:n:s1793993322500077
    DOI: 10.1142/S1793993322500077
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    More about this item

    Keywords

    Life cycle saving; interest elasticity; old age dependency; dynamic error components model; jackknife bias correction;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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