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The Interest Elasticity of Household Savings: A Structural Approach with German Micro Data

Referierte Aufsätze Web of Science

Martin Beznoska, Richard Ochmann

In: Empirical Economics 45 (2013), 1, S. 371-399


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.

JEL-Classification: D12;D91;E21
Keywords: Consumption, savings decision, Interest rate elasticity of savings, Savings function, Intertemporal QUAIDS