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The Short-Run and Long-Run Determinants of Household Saving: Evidence from OECD Economies


This paper examines the relationship between interest rates and household saving rates for an uneven panel of 19 OECD countries during the period 1995–2018. Unlike earlier studies, it uses the pooled mean group methodology to investigate which of the interest rate effects, income or substitution, dominates in the short run, long run, or both periods. With the baseline estimations, I find that the income effect outweighs the substitution effect in the short run, and vice versa in the long run. I also find that inflation (both expected and actual), household wealth through housing prices, unemployment rate, current taxes on income and wealth, and general government debt have significant negative impact on household saving in the long run. I find that financial development has a positive effect on household saving in the long run. Current taxes on income and wealth have a strong negative impact on household saving in the short run.

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  1. 1.

    Some central banks with negative interest rate policy include (note: adoption dates in parenthesis)—Danmarks National Bank (July 2012), European Central Bank (June 2014), Swiss National Bank (January 2015), Sveriges Riksbank (February 2015), Bank of Japan (January 2016), and National Bank of Hungary (March 2016).

  2. 2.

    See Fig. 1 for the plots of the real gross saving rate for the panel and the EU. Individual country-plots are not shown but are available upon request.

  3. 3.

    Ul Haque et al. (1999) and Hüfner and Koske (2010) all observe that institutional constraints tend to be more binding in the short run and may thus cause saving ratios across countries to respond differently to changes in the underlying fundamentals.

  4. 4.

    See Gylfason (1993) for a tabulated historical overview of the effects of interest rates and inflation on aggregate consumption and saving in the USA.

  5. 5.

    See Hüfner and Koske (2010) for an overview of the determinants of household saving rates in panel studies.

  6. 6.

    Ul Haque et al. (1999) show that ignoring cross-country differences can result in the overestimation of the effects of certain factors on the private saving rates and at the same time obtain highly significant, but spurious, nonlinear effects for some of the potential determinants.

  7. 7.

    Aizenman et al. (2019) for a detailed discussion of the theoretical predictions of private saving.

  8. 8.

    A detailed theoretical formulation and analysis of short- and long-run mechanism, which has been ignored in the literature would offer useful insights; however, it is beyond the scope of this paper.

  9. 9.

    See Gylfason (1993) for an elaborative procedure and defence of the use of adaptive expectations rather than rational expectations. Although a market based expected inflation is preferable, survey data is not available for all countries in the panel; hence, the use of adaptive expectation method.

  10. 10.

    See Pesaran et al. (1999) for an elaborative discussion of the PMG estimation method.

  11. 11.

    The results did not significantly differ when the Akaike’s information criterion (AIC) was used to determine the optimal number of lags.

  12. 12.

    The approach is to start with a trivial regression and observe the results of subsequent addition of other variables. However, for some cases I present the baseline result directly.

  13. 13.

    Caution must be taken in comparing these results with other panel studies which use the real interest in its estimation.

  14. 14.

    The standard errors of the parameter estimates are a bit higher which suggest this equation might not fit the data quite well, as compared with model estimated with the expected rate of inflation.

  15. 15.

    The use of long-term nominal interest rates here is merely a distinct empirical exercise and should not to be viewed as a substitute for the short-term nominal interest rate in the hypothesis testing. Monetary policy is generally presumed to have a limited impact on the long-term rates.

  16. 16.

    I do not simultaneously add more than three policy variables to the benchmark model in order to ensure a sufficient number of degrees of freedom.

  17. 17.

    See Schmidt-Hebbel et al. (1992) for a tabulated long list of variables with their expected sign as well as the results of 16-panel studies of private saving.

  18. 18.

    Consumption tax, if it is linear, does not distort household’s intertemporal decision. Wage and capital income taxes do influence the household’s intertemporal saving and consumption decisions.

  19. 19.

    See, for example, Howard; Howrey and Hymans 1978; Masson et al. 1998) for a detailed discussion on the ambiguous effects of these variables).

  20. 20.

    Note that the one-year expected rate of inflation is already part of the baseline specification.

  21. 21.

    AIC is more reliable than a fixed lag; thus, ARDL (1, 1, 1, 1) since T is small in this study. Moreover, estimations with a common ARDL (1, 1, 1, 1) showed more evidence of misspecification than when the lag was chosen by AIC.


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I thank Paulo Brito, Antonio Afonso, and participants of the INFER Workshop on New Challenges for Fiscal Policy for helpful insights and discussions. I also acknowledge useful comments of two anonymous referees. The paper represents the authors' personal opinions and does not reflect the views of the affiliated institution.

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Correspondence to Philemon Kwame Opoku.

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Appendix: Data Descriptions and Sources

Appendix: Data Descriptions and Sources

Real Gross Saving Rate (in percent of gross disposable income)\(s_{i t}^{rg}\): Saving of households and non-profit institutions serving households (NPISH) without deducting consumption of fixed capital and deflated by the price deflator private final consumption expenditure. Source: AMECO database.

Real Net Saving Rate (in percent of gross disposable income)\(s_{i t}^{rn}\): Saving of households and non-profit institutions serving households (NPISH) after deducting consumption of fixed capital and deflated by the private final consumption expenditure. Source: AMECO database.

Short-term Nominal Interest Rate\(i_{i t}^{sn}\): Mainly policy interest rates or 3-months money market rates. Source: AMECO database.

Long-term Nominal Interest Rate\(i_{i t}^{ln}\): Mainly Central Government bonds of over 10 years. Source: AMECO database.

Long-term Real Interest Rate\(i_{i t}^{lr}\): Long-term nominal interest rate (iln) adjusted for price deflator private final consumption expenditure. Source: AMECO database.

Unemployment Rate\(u_{i t}\): Share of the total active population (labour force). Source: AMECO database.

Current Taxes on Income and Wealth\(t_{i t}\): Comprise taxes on income from employment, property, entrepreneurship, pensions, etc., including taxes deducted by employers (PAYE taxes) and other current taxes on capital, poll taxes, levied per adult or per household, independently of income or wealth, expenditure taxes, payable on the total expenditures of persons or households. Source: AMECO database.

General Government Gross Debt\(gd_{i t}\): General government net financial liabilities as percent of GDP. Source: AMECO database. Given the lack of general public debt data for some countries such as Switzerland, central government debt data is used as an alternative.

Domestic credit to private sector (as a percentage of GDP\(dcr_{i t}\)): Financial resources provided to the private sector by financial corporations, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. Source: IMF, IFS, and World Bank and OECD GDP estimates.

Real Housing Price Index\(hpr_{i t}\): Nominal house price indices deflated by the consumer price index. Source: OECD Analytical database.

Expected Inflation\(\pi _{i t}^{e}\): Computed (on the assumption of adaptive expectations of price expectations) from the annual rate of change (\(\Delta pcdef\)) of the price deflator private final consumption expenditure (pcdef) in per cent per annum with adjustment weights (\(\lambda\)) varying from 0.1 to 1. Series with the best prediction of dpcd was used as expected rate of inflation:

$$\begin{aligned} \pi _{it}^{e} =\lambda \Delta pcdef_{it}+(1-\lambda ) \pi ^{e}_{_{it}-1} \end{aligned}$$

Rate of Inflation\(\pi _{i t}\): Computed as annual rate of change of the price deflator private final consumption expenditure (pcd) in percent per annum:

$$\begin{aligned} \pi _{it} =100.0 *((\text{ pcd }_{\mathrm{it}}/ {{\text {pcd}_\mathrm{it-1}}})-1) \end{aligned}$$

Similar results could be obtained with:

$$\begin{aligned} \pi _{it} =100.0 *(\log ({\text {pcd}}_{\mathrm{it}})-\log ({\text {pcd}}_{\mathrm{it}-1})) \end{aligned}$$

Source: Author’s computation.

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Opoku, P.K. The Short-Run and Long-Run Determinants of Household Saving: Evidence from OECD Economies. Comp Econ Stud 62, 430–464 (2020).

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  • Household saving
  • Interest rates
  • Inflation
  • Taxation
  • Unemployment rate
  • Dynamic heterogeneous panel data model

JEL Clssifications

  • E21
  • E24
  • E43
  • C23