Prague Economic Papers 2020, 29(5):545-560 | DOI: 10.18267/j.pep.741

Interest Rates and Household Saving Behaviour: An Empirical Puzzle and a Solution Using Czech Data

Ondřej Baduraa
a VSB - Technical University of Ostrava, Ostava, Czech Republic

This paper investigates the transmission from interest rates to household saving behaviour when introducing two main innovations of analysing this relationship. The first one is based on the use of a set of client interest rates instead of one monetary policy rate. This step enables us to distinguish impacts of the substitution and income effects in more detail. The second major innovation lies in the division of households into income categories, which provides us with more observations and thus makes it possible to conduct this analysis even for a single country. Using the generalized method of moments for the dynamic panel data, we analyse Czech household behaviour for the period 2004-2015. The results highlight that when we ignore details of the transmission channel and use only a monetary policy rate, we lose crucial information about contradictory impacts of the substitution and income effects that are primarily reflected in the client interest rates. This fact may clarify most of the interest rate-savings rate puzzle.

Keywords: Client interest rates, monetary policy rate, savings rate, income categories, Czech households, panel GMM
JEL classification: C33, D12, D14

Received: January 21, 2019; Revised: November 7, 2019; Accepted: November 7, 2019; Prepublished online: March 13, 2020; Published: October 16, 2020  Show citation

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Badura, O. (2020). Interest Rates and Household Saving Behaviour: An Empirical Puzzle and a Solution Using Czech Data. Prague Economic Papers, 29(5), 545-560. doi: 10.18267/j.pep.741
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