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The effect of interest-rate changes on household saving and consumption: a survey

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  • 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. The models that likely describe the behavior of the people who account for most of aggregate saving imply positive interest elasticities of saving.

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File URL: http://www.federalreserve.gov/pubs/feds/1996/199627/199627abs.html
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File URL: http://www.federalreserve.gov/pubs/feds/1996/199627/199627pap.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-27.

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Date of creation: 1996
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Handle: RePEc:fip:fedgfe:96-27

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Related research

Keywords: Consumption (Economics) ; Consumer behavior ; Interest rates;

References

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  1. Feldstein, Martin, 1995. "Fiscal policies, capital formation, and capitalism," European Economic Review, Elsevier, vol. 39(3-4), pages 399-420, April.
  2. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
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Citations

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Cited by:
  1. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, number 23.
  2. John M. Roberts, 2007. "Learning, Sticky Inflation, and the Sacrifice Ratio," Kiel Working Papers 1365, Kiel Institute for the World Economy.
  3. B. Douglas Bernheim, 1999. "Taxation and Saving," NBER Working Papers 7061, National Bureau of Economic Research, Inc.
  4. Ana María Iregui & Ligia Alba Melo B., 2009. "La transmisión de la política monetaria sobre el consumo en presencia de restricciones de liquidez," BORRADORES DE ECONOMIA 005254, BANCO DE LA REPÚBLICA.
  5. Engelhardt, Gary V. & Kumar, Anil, 2007. "Employer matching and 401(k) saving: Evidence from the health and retirement study," Journal of Public Economics, Elsevier, vol. 91(10), pages 1920-1943, November.
  6. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America save for its old age? Population aging, national saving, and fiscal policy," Finance and Economics Discussion Series 2000-03, Board of Governors of the Federal Reserve System (U.S.).
  7. Power, Laura & Rider, Mark, 2002. "The effect of tax-based savings incentives on the self-employed," Journal of Public Economics, Elsevier, vol. 85(1), pages 33-52, July.
  8. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America Save for Its Old Age? Fiscal Policy, Population Aging, and National Saving," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 57-74, Summer.
  9. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
  10. Sebastian Barnes & Garry Young, 2003. "The rise in US household debt: assessing its causes and sustainability," Bank of England working papers 206, Bank of England.
  11. Junning Cai, 2003. "Fundamental Paper Wealth and Monetary Policy," Macroeconomics 0309001, EconWPA.
  12. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
  13. Smith, Douglas, 2001. "International evidence on how income inequality and credit market imperfections affect private saving rates," Journal of Development Economics, Elsevier, vol. 64(1), pages 103-127, February.
  14. Junning Cai, 2003. "Asset Prices and Monetary Policy: Some Notes," Macroeconomics 0305006, EconWPA, revised 13 May 2003.
  15. Roy Cromb & Emilio Fernandez-Corugedo, 2004. "Long-term interest rates, wealth and consumption," Bank of England working papers 243, Bank of England.
  16. Árvai, Zsófia & Menczel, Péter, 2001. "A magyar háztartások megtakarításai 1995 és 2000 között
    [The savings of Hungarian households between 1995 and 2000]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 93-113.

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