Wednesday, February 2, 2011

Explaining Household Saving: It's Not What You Think

An interesting post over at Econbrowser posits the idea that the rate of household savings is not driven by household income (or, more precisely, disposable income), as is often the assumption, bur rather by the availability of household credit.

If you look at household savings as a buffer against possible economic calamity (a kind of self-administered insurance policy), then this makes a lot of sense. If people have credit available to them easily in the event of a personal financial problem, then they don't need to save for a rainy day; if they don't have credit readily available to them, they have to save money in order to have a financial buffer, which will increase the savings rate and decrease household consumption. Here's the chart that illustrates the fit of the credit availability model, compared with the (apparently inferior) disposable income model:

Figure 4 Actual and fitted household saving rates. Source: FRBSF Economic Letter 2011-01

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