Interest elasticity of consumers’ expenditure

  • M. J. Dicks


In this chapter some new evidence is presented on the subject of the interest elasticity of consumers’ expenditure based on UK data. We find that, although the issue is by no means settled, the weight of evidence does seem to favour what Boskin (1987) calls a ‘modest positive interest elasticity of private saving’. Moreover, interest rate effects appear to have increased (in both size and significance) during the 1980s, a period in which competition in UK financial markets has increased as a result of the Government’s policy of deregulation. This liberalization has led to a weakening of the liquidity constraints which previously restricted households’ choice and, although this will have had the effect of permitting consumers to move closer to their desired (life-cycle) levels of expenditure (since they may now find it easier to borrow through periods when income is temporarily low, thus maintaining a smoother consumption profile over time), at the same time the proportion of households that are likely to react to changes in interest rates will have risen. Our findings suggest that the latter effects may dominate, at least in the short run, implying that the leverage of monetary policy may have been strengthened as a result of deregulation of the financial markets.


Interest Rate Real Interest Rate Income Elasticity NBER Working Paper Liquidity Constraint 
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© Chapman and Hall Ltd 1990

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  • M. J. Dicks

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