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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page The Effect of Interest-Rate Changes on Household Saving and Consumption: A Survey
Douglas W. Elmendorf

Abstract: Direct estimates of the interest elasticity of saving suffer from several serious problems. As an alternative, this survey uses an indirect approach that combines models of individual behavior with estimates of certain features of individuals' preferences. The paper examines the effect of interest-rate changes on the consumption and saving of people who follow the lifecycle model, who plan to leave bequests, who save to reach a fixed target, and who have short planning horizons. The models that likely describe the behavior of the people who account for most of aggregate saving imply positive interest elasticities of saving.

Keywords: Consumption, saving, interest elasticity

Full paper (527 KB PDF) | Full paper (884 KB Postscript)

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Last update: July 16, 1997