Excess saving and low interest rates: Theory and empirical evidence
The debate on low real long-term interest rates is dominated by the loanable funds theory (LFT). 'Excess saving', above all due to demographic factors, is regarded as a primary cause of low rates. In this paper, we show that LFT is not an appropriate theoretical framework. It is based on a commodity paradigm ('real analysis') which cannot represent a financial system with a flow of funds consisting of money. In a 'monetary analysis' saving is disconnected from the supply of funds. Funds are provided by banks, which create money, and investors that are willing to give up liquidity. A simple model which is based on 'monetary analysis' is the IS/LM-model. In this model, even at the zero lower bound 'excess saving' is not possible. The empirical evidence for 'excess saving' is weak. At the global level and for the United States the net saving rate and the gross household saving rate have declined significantly since the 1980s. In line with the monetary analysis, a 'financing glut' can be identified for the United States for the period preceding the Great Recession. It was followed by a 'borrowing dearth'. For the postwar period, the real rates of the early 1980s can be identified as an outlier, and thus the trend decline since this period can be regarded as a reversion to the mean.
|Date of creation:||Jun 2017|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John B. Taylor, 2012.
"Monetary Policy Rules Work and Discretion Doesn't: A Tale of Two Eras,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 44(6), pages 1017-1032, 09.
- John B. Taylor, 2012. "Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras," Discussion Papers 11-019, Stanford Institute for Economic Policy Research.
- Bibow, Jorg, 2001. "The Loanable Funds Fallacy: Exercises in the Analysis of Disequilibrium," Cambridge Journal of Economics, Oxford University Press, vol. 25(5), pages 591-616, September.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, July.
- Christian Dreger & Jürgen Wolters, 2011. "Money and Inflation in the Euro Area during the Financial Crisis," Discussion Papers of DIW Berlin 1131, DIW Berlin, German Institute for Economic Research.
- Dreger, Christian & Wolters, Jürgen, 2011. "Money and inflation in the euro area during the financial crisis," Discussion Papers 300, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
- Andrea Terzi, 2016. "A T-shirt model of savings, debt, and private spending: lessons for the euro area," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 13(1), pages 39-56, April.
- Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, July.
- repec:eee:moneco:v:89:y:2017:i:c:p:1-19 is not listed on IDEAS
- Fabian Lindner, 2015. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," World Economic Review, World Economics Association, vol. 2015(4), pages 1-1, February.
- Fabian Lindner, 2013. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," IMK Working Paper 120-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
- Morris A. Copeland, 1952. "A Study of Moneyflows in the United States," NBER Books, National Bureau of Economic Research, Inc, number cope52-1, 01.
- Evan C Tanner, 2017. "The Algebraic Galaxy of Simple Macroeconomic Models; A Hitchhiker’s Guide," IMF Working Papers 17/123, International Monetary Fund.
- Francesco Grigoli & Alexander Herman & Klaus Schmidt-Hebbel, 2014. "World Saving," IMF Working Papers 14/204, International Monetary Fund. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:12111. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.