13 August 2013

Savings and Real Interest Rates

Following up on yesterday's post, do higher interest rates incentivise saving? Do lower interest rates encourage people to save more to meet a savings target? Or is saving unaffected; people save what is left over after paying for everything else?

It is an empirical question, and so I have tried to find data to provide an answer. I was not happy with my first go because the data I had was for nominal interest rates. To strip out any effects of inflation I have found data on real interest rates from the world bank. Combining this with the ONS data on savings rates (via the BoE) for 1967-2009, I have produced this scatter chart.

Source: World Bank, ONS via BoE
Is there a correlation? I have put a trend line on the data, but don't take it seriously. The R squared is less than 0.01, which means that the savings rate is independent of the interest rate.

On a loanable funds model this implies a vertical supply curve, just like my old textbook said.

The same caveats as yesterday apply. This is one country over one period and done in a rush. Other empirical analyses are welcome.

1 comment:

  1. Very interesting. But taking the two charts together, could it be that there is a powerful money illusion: when NOMINAL rates are high people jack up savings, even if REAL rate is low????