An Explanation of the Behavior of Personal Savings in the United States in Recent Years

23 Pages Posted: 27 Apr 2000 Last revised: 2 Apr 2010

See all articles by Eytan Sheshinski

Eytan Sheshinski

Hebrew University of Jerusalem; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Vito Tanzi

International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Date Written: July 1989

Abstract

A sharp increase in the real interest rates in the U.S. in the 1980s was expected to induce a higher personal saving rate. Actually, between 1981 and 1983 the personal saving rate fell from 7.5 percent to 5.4 percent and for the 1985-1988 period it had averaged only 4 percent even though real interest rates have remained high. We argue that one possible explanation for this negative relation between interest rates and the personal saving rate is the large fraction of wealth, especially financial wealth, held by persons over 65 years old (this group has received more than 50 percent of all interest income in the U.S. during this period). Life cycle theory suggests, as we demonstrate, that the wealth effect created by an increase in the rate of interest reduces the savings of old persons and raises savings of the young and hence the effect on aggregate savings depends on the age distribution in the population.

Suggested Citation

Sheshinski, Eytan and Tanzi, Vito, An Explanation of the Behavior of Personal Savings in the United States in Recent Years (July 1989). NBER Working Paper No. w3040. Available at SSRN: https://ssrn.com/abstract=227475

Eytan Sheshinski (Contact Author)

Hebrew University of Jerusalem ( email )

Department of Economics
Jerusalem 91905
Israel
972-2-588-3144 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Vito Tanzi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Tax Policy Division Fiscal Affairs Department
Washington, DC 20431
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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