How Do Savings of Different Sectors Respond to Interest Rate Change

Abstract

The literature investigates the relation between savings and interest rate
mainly for household sector, but in recent decades households ceased to be
the main source of savings in the economy. We try to identify how the
savings of different sectors respond to the interest rate change using the SVAR
methodology. We focus on Poland and generalize the results for other European
economies. We find that although the household savings rate tends to rise after
an increase of interest rate, the corporate savings simultaneously fall, inducing a
negative conditional correlation between them. The responses of savings rate of
general government and foreign savings are diverse (although the former usually
declines after an interest rate increase) and does not seem to be related to factors
like the membership in the currency union or the level of public debt. We also
check the existence of the ‘crowding-out’ effects and conclude it only applies in
the case of government savings crowding out household savings.