IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v45y2013i1p371-399.html
   My bibliography  Save this article

The interest elasticity of household savings: a structural approach with German micro data

Author

Listed:
  • Martin Beznoska
  • Richard Ochmann

Abstract

This paper empirically investigates the effects of changes in the interest rate as well as in the current and expected future consumer price levels on households’ consumption–savings decision. In a structural demand model applied to German consumption data, we use cross-sectional and longitudinal variation in prices and tax rates to construct individual after-tax interest rates and cluster-specific consumer prices. We find that the compensated own-price elasticities for savings as well as consumption are significantly negative, while the theoretical model implications of homogeneity and symmetry must be rejected. Importantly, we estimate the uncompensated interest rate elasticity of savings, in line with the literature, at around zero. Some heterogeneity in this elasticity is found along the savings and wealth distribution. We conclude that short-term policy-induced variation of net returns to savings is expected to have no significant effects on the level of compound savings. Copyright Springer-Verlag 2013

Suggested Citation

  • Martin Beznoska & Richard Ochmann, 2013. "The interest elasticity of household savings: a structural approach with German micro data," Empirical Economics, Springer, vol. 45(1), pages 371-399, August.
    • Handle: RePEc:spr:empeco:v:45:y:2013:i:1:p:371-399
    DOI: 10.1007/s00181-012-0626-9
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00181-012-0626-9
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s00181-012-0626-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
    2. Richard Disney & Carl Emmerson & Matthew Wakefield, 2010. "Tax Reform and Retirement Saving Incentives: Take‐up of Stakeholder Pensions in the UK," Economica, London School of Economics and Political Science, vol. 77(306), pages 213-233, April.
    3. Roger S. Smith, 1990. "Factors Affecting Saving, Policy Tools, and Tax Reform: A Review," IMF Staff Papers, Palgrave Macmillan, vol. 37(1), pages 1-70, March.
    4. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    5. Friend, Irwin & Hasbrouck, Joel, 1983. "Saving and After-Tax Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 537-543, November.
    6. Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, vol. 85(1), pages 186-200, March.
    7. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-346, April.
    8. Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-1137, December.
    9. Summers, Lawrence H, 1984. "The After-Tax Rate of Return Affects Private Savings," American Economic Review, American Economic Association, vol. 74(2), pages 249-253, May.
    10. Martin Beznoska & Richard Ochmann, 2010. "Household Savings Decision and Income Uncertainty," Discussion Papers of DIW Berlin 1046, DIW Berlin, German Institute for Economic Research.
    11. Carroll Christopher Dixon, 2001. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-38, April.
    12. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    13. Annamaria Lusardi & Olivia S. Mitchell, 2017. "How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(03), pages 1-31, September.
    14. Joseph DeJuan & John Seater & Tony Wirjanto, 2006. "Testing the permanent-income hypothesis: new evidence from West-German states ( Länder)," Empirical Economics, Springer, vol. 31(3), pages 613-629, September.
    15. Makin, John H & Couch, Kenneth A, 1989. "Saving, Pension Contributions, and the Real Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 401-407, August.
    16. Pollak, Robert A & Wales, Terence J, 1981. "Demographic Variables in Demand Analysis," Econometrica, Econometric Society, vol. 49(6), pages 1533-1551, November.
    17. Slesnick, Daniel T, 1992. "Aggregate Consumption and Saving in the Postwar United States," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 585-597, November.
    18. Garner, Thesia I. & Verbrugge, Randal, 2009. "Reconciling user costs and rental equivalence: Evidence from the US consumer expenditure survey," Journal of Housing Economics, Elsevier, vol. 18(3), pages 172-192, September.
    19. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-1157, December.
    20. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    21. Grimes, Arthur & Wong, Alfred Y-T. & Meads, Chris S., 1994. "A note on the correct specification of financial portfolio AIDS models," European Economic Review, Elsevier, vol. 38(5), pages 1171-1174, May.
    22. Bernheim, B. Douglas, 2002. "Taxation and saving," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 18, pages 1173-1249, Elsevier.
    23. Rob Alessie & Federica Teppa, 2010. "Saving and habit formation: evidence from Dutch panel data," Empirical Economics, Springer, vol. 38(2), pages 385-407, April.
    24. Gylfason, Thorvaldur, 1981. "Interest Rates, Inflation, and the Aggregate Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 233-245, May.
    25. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 4, number 4.
    26. Feige, Edgar L & Pearce, Douglas K, 1976. "Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy?," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 499-522, June.
    27. Evans, Owen J, 1983. "Tax Policy, the Interest Elasticity of Saving, and Capital Accumulation: Numerical Analysis of Theoretical Models," American Economic Review, American Economic Association, vol. 73(3), pages 398-410, June.
    28. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
    29. Katz, Arnold J, 1983. "Valuing the Services of Consumer Durables," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 29(4), pages 405-427, December.
    30. James N. Morgan, 1951. "The Structure of Aggregate Personal Saving," Journal of Political Economy, University of Chicago Press, vol. 59, pages 528-528.
    31. Laurits R. Christensen & Dale W. Jorgenson, 1969. "The Measurement Of U.S. Real Capital Input, 1929–1967," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 15(4), pages 293-320, December.
    32. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    33. Arthur Lewbel, 1989. "Identification and Estimation of Equivalence Scales under Weak Separability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(2), pages 311-316.
    34. Richard Ochmann, 2014. "Differential income taxation and household asset allocation," Applied Economics, Taylor & Francis Journals, vol. 46(8), pages 880-894, March.
    35. Robin Boadway & David Wildasin, 1994. "Taxation and savings: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 15(3), pages 19-63, August.
    36. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    37. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311, Elsevier.
    38. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3.
    39. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, vol. 44(4), pages 631-650, July.
    40. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
    41. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    42. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762.
    43. Martin Beznoska & Richard Ochmann, 2012. "Liquidity Constraints and the Permanent Income Hypothesis: Pseudo Panel Estimation with German Consumption Survey Data," Discussion Papers of DIW Berlin 1231, DIW Berlin, German Institute for Economic Research.
    44. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ueno, Yuko & Namba, Ryoichi, 2014. "Heterogeneity and Biases in Inflation Expectations of Japanese Households," CIS Discussion paper series 614, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    2. Homburg, Stefan, 2017. "A Study in Monetary Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198807537.
    3. Ansgar Belke & Christian Dreger & Richard Ochmann, 2015. "Do wealthier households save more? The impact of the demographic factor," International Economics and Economic Policy, Springer, vol. 12(2), pages 163-173, June.
    4. Nico Pestel & Eric Sommer, 2017. "Shifting Taxes from Labor to Consumption: More Employment and more Inequality?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63(3), pages 542-563, September.
    5. repec:zbw:rwirep:0338 is not listed on IDEAS
    6. Pottier, Antonin, 2022. "Expenditure elasticity and income elasticity of GHG emissions: A survey of literature on household carbon footprint," Ecological Economics, Elsevier, vol. 192(C).
    7. Ansgar Belke & Christian Dreger & Richard Ochmann, 2012. "Do Wealthier Households Save More? – The Impact of the Demographic Factor," Ruhr Economic Papers 0338, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    8. Makarski, Krzysztof & Tyrowicz, Joanna & Komada, Oliwia, 2021. "Efficiency versus Insurance: Capital Income Taxation and Privatizing Social Security," IZA Discussion Papers 14805, Institute of Labor Economics (IZA).
    9. Petra Gerlach-Kristen & Rossana Merola, 2019. "Consumption and credit constraints: a model and evidence from Ireland," Empirical Economics, Springer, vol. 57(2), pages 475-503, August.
    10. Manuel Rupprecht, 2020. "Income and wealth of euro area households in times of ultra-loose monetary policy: stylised facts from new national and financial accounts data," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(2), pages 281-302, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Douglas W. Elmendorf, "undated". "The Effect of Interest-Rate Changes on Household Saving and Consumption: A Survey," Finance and Economics Discussion Series 1996-27, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    2. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    3. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
    4. Richard Ochmann, 2014. "Differential income taxation and household asset allocation," Applied Economics, Taylor & Francis Journals, vol. 46(8), pages 880-894, March.
    5. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    6. Bernheim, B. Douglas, 2002. "Taxation and saving," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 18, pages 1173-1249, Elsevier.
    7. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    8. Striani, Fabrizio, 2023. "Life-cycle consumption and life insurance: Empirical evidence from Italian Survey," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 619(C).
    9. Daria Pignalosa, 2021. "The Euler Equation Approach: Critical Implications of Recent Developments in the Theory of Intertemporal Choice," Bulletin of Political Economy, Bulletin of Political Economy, vol. 15(1), pages 1-43, June.
    10. Crump, Richard K. & Eusepi, Stefano & Tambalotti, Andrea & Topa, Giorgio, 2022. "Subjective intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 118-133.
    11. Tomas Havranek, 2013. "Publication Bias in Measuring Intertemporal Substitution," Working Papers IES 2013/15, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2013.
    12. Tomáš Havránek, 2015. "Measuring Intertemporal Substitution: The Importance Of Method Choices And Selective Reporting," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1180-1204, December.
    13. Shin-Ichi Nishiyama, 2011. "The Cross-Euler Equation Approach to testing for the Liquidity Constraint: Evidence from Macro and Micro Data," TERG Discussion Papers 273, Graduate School of Economics and Management, Tohoku University.
    14. Havranek, Tomas & Horvath, Roman & Irsova, Zuzana & Rusnak, Marek, 2015. "Cross-country heterogeneity in intertemporal substitution," Journal of International Economics, Elsevier, vol. 96(1), pages 100-118.
    15. Daria Pignalosa, 2019. "On the role of the utility function in the estimation of preference parameters," Metroeconomica, Wiley Blackwell, vol. 70(4), pages 793-820, November.
    16. DeJuan, Joseph P. & J. Seater, John, 1999. "The permanent income hypothesis:: Evidence from the consumer expenditure survey," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 351-376, April.
    17. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
    18. Jacobs, Kris, 2000. "Estimating Nonseparable Preference Specifications for Asset Market Participants," Econometric Society World Congress 2000 Contributed Papers 1472, Econometric Society.
    19. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
    20. Richard Ochmann, 2013. "Asset demand in the financial AIDS portfolio model -- evidence from a major tax reform," Applied Financial Economics, Taylor & Francis Journals, vol. 23(8), pages 649-670, April.

    More about this item

    Keywords

    Consumption–savings decision; Interest rate elasticity of savings; Savings function; Intertemporal QUAIDS; D12; D91; E21;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:45:y:2013:i:1:p:371-399. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.