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.