Looking for an interest rate effect on private saving

Comments on
The Interest Rate Effect on Private Saving:
Alternative Perspectives
by Joshua Aizenman, Yin-Wong Cheung, and Hiro Ito
Hans Genberg
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the
Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

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 Outline

1. Why We Should Pay Attention

2. Income and Substitution Effects
3. Results
Baseline
With interaction terms
4. Questions and Concerns
a) Data
b) Theory behind the interaction terms
c) Are the results driven by Time series vs. Cross section variation
5. Final Remarks

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 Why We Should Pay Attention

Is there a transmission of monetary policy to aggregate

demand through an effect of the rate of interest on saving?
If so, does the level of the rate of interest matter for the size of
the effect? In particular, is it possible that at some low level of
the interest rate the sign of the transmission effect reverses?
Is the size of the interest effect stable over time and across
economies?

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Income and Substitution Effects:
the creditor case

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Income and Substitution Effects:
the debtor case

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 Empirical Results 1:
Baseline
Imprecise estimates
Positive effect are more common
Statistical significance vs economic significance
Failing a test of being different from zero does not mean that the
coefficient is zero
Size of the effect:
Dependent variable on the order of 0.1 to 0.4
The interest rate appears to be measures as 1 + r, i.e. 1.02 for a real interest
rate of 2%
The coefficient on the interest rate is typically less than 0.1
The consequence of an interest rate decline from 2% to 0% is a decline in the
savings rate from 0.1 to 0.098 or from 0.4 to 0.398. There must be something
wrong with my calculations!
It would be useful if the paper discussed the economic significance of the
estimates

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 Questions and Concerns 1:
Data
I appreciate the difficulty in acquiring data for such a wide
panel of countries, but
Measurement of the nominal interest rate
Principally policy rates. But are policy rates the most relevant for
savings decisions?
If the two are different, but the difference between them is constant
over time and across countries then there is no problem. But I
suspect that this is not the case.
Measurement of the real interest rate
1+ 1+
instead of
1+ 1+
I suspect that actual inflation is (much) more volatile than actual
inflation. This will have an impact on the estimation results

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 Alternative interest rates
If
i = the interest rate that is relevant for savings decisions
ip = the policy interest rate
r = the real interest rate based on i and expected inflation
rAIC = the real interest based on ip and actual inflation

then

+
Classical Errors-in-Variables problem

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 Questions and Concerns 2:
What to expect from the interaction terms
Issue: How do the following variables influence the effect of
changes in the interest rate on saving?

Extremely low interest rates

Output volatility
Old dependency
Financial development

What we should expect to see from these interaction terms is

not obvious from the simple model I have used so far

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Are lower interest rates associated with smaller or
larger interest rate effects on saving?

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The effect of
more volatile
income:
precautionary
saving, but not
necessarily a
different
reaction to a
change in the
interest rate

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Two different countries (individuals): Debtors vs
Creditors (correlated with dependency ratio?)

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 Empirical Results 2:
Interaction Effects
For the most part, estimates are imprecise
Extremely low interest rates
Very heterogeneous results across country groups.
Output volatility
Positive* for IDC, negative for LDC and EMG
Old dependency
Positive for IDC, negative for LDC and EMG
Financial development
Positive for IDC and EMG, negative for LDC

* POSITIVE MEANS THAT A POSITIVE IMPACT OF THE INTEREST RATE ON SAVING

BECOMES STRONGER AND THAT A NEGATIVE EFFECT BECOMES WEAKER

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 Questions and Concerns 3:
Time Series vs. Cross Section
Cross country variance in the data is larger than time series variance

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 Questions and Concerns 3:
Time Series vs. Cross Section
Cross country variance in the data is larger than time series
variance
Hypothesis: The estimation will put more weight on cross
sectional effects rather than time series effects
In other words, the results tell us mostly about saving
behavior in high interest rate countries vs low interest rate
countries
If this is right, then the results do not necessarily tell us
what would happen in a particular country if the interest
rate is lowered over time.

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 Final Remarks

Impressive amount of work

Transmission of monetary policy through the interest rate does
not occur principally through changes in private saving
But there may still be effects through investment
There are also other potential transmission channels, notably the
exchange rate is highly open economies.
Suggestions
Provide information about the economic significance of the various
results.
Group countries according to the size of the savings ratio and run
separate regressions for each group

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