The Saving Rate of Euro Area Households and the Interest Elasticity of Saving during the Great Recession

Macroeconomic models and empirical evidence establish a positive relationship between real returns and the rate of saving. Nevertheless, in 2009, despite plummeting real interest rates to saving deposits, the saving rate of Euro Area households experienced a large increase. It is the aim of this paper to investigate whether this unexpected upsurge, could have been caused by a temporarily negative interest elasticity of saving, triggered in turn by a decrease in households’ elasticity of intertemporal substitution. To do so, we make use of a two period model of life-cycle consumption. Contrary to what we hypothesised, our results suggest that households’ interest elasticity of saving increased in the vicinity of 2009, in spite of a decrease in their elasticity of intertemporal substitution.