The Interest Rate Effect on Private Saving: Alternative Perspectives

Joshua Aizenman, Yin Wong Cheung, Hiro Ito

Research output: Contribution to journalArticlepeer-review

10 Scopus citations


Lowering the policy interest rate could stimulate consumption and investment while discouraging people from saving. However, such a move may also prompt people to save more to compensate for the low rate of return. Using the data of 135 countries from 1995 to 2014, we show that a low interest rate environment can yield different effects on private saving under different economic environments. The real interest rate affects private saving negatively if output volatility, old-age dependency, or financial development is above a certain threshold. Depending on a country's specific economic circumstances, these effects are significant for the economy - a four-percentage point decline in the real interest rate, which is approximately the same as one standard deviation for China, would lead to a 1.52 percentage point increase in the Chinese private saving rate. Further, when the real interest rate is below 1.1%, greater output volatility would lead to higher private saving in developing countries.

Original languageEnglish
Article number1950002
JournalJournal of International Commerce, Economics and Policy
Issue number1
StatePublished - 1 Feb 2019
Externally publishedYes


  • Income effect of interest rate
  • financial development
  • old-age dependency
  • output volatility
  • substitution effect of interest rate

ASJC Scopus subject areas

  • General Business, Management and Accounting
  • Finance
  • Economics and Econometrics


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