The Review of Economics and Statistics Vol. 43 No. 1 1961
The Relationship of Saving to the Rate of Interest, Real Income, and Expected Future Prices
Abstract
IT is widely believed that for some individuals saving may be negatively related to the rate of interest. The argument is usually put in terms of a person's desire to have a particular sum (or an annuity of a particular size) available at some future date. In such a circumstance a rise in the rate of interest will make easier (in terms of present abstention from consumption) the attainment of that particular future sum (or annuity). Therefore, the argument continues, the rise in the interest rate will reduce saving.' We do not wish to question the proposition that such perverse reaction to changes in the interest rate may adequately describe the behavior of some individuals; however, we do propose to criticize the extension of the proposition about individuals to the body of consumers in aggregate. This paper takes issue with those who contend that the aggregate saving-interest rate function for households may be perverse. 2 Our purpose is threefold. First, we wish to demonstrate that the use of the saving-for-a-fixedfuture-sum argument as support for the hypothetical negative relation between aggregate personal saving and the interest rate has unacceptable implications. In particular, it will be shown that it implies that aggregate personal saving is non-positively associated with aggregate real income.3 Second, we shall argue that a more general way to discuss a negative relation between saving and the rate of interest is in terms of the price elasticity of demand for future goods. Saving for a fixed future sum is a special case of this more general phenomenon. But third, we shall demonstrate that if the aggregate saving-interest rate relation is perverse, then the implied reaction of consumers to changes in expected future money prices would also be perverse.4 We shall treat these matters in turn after introducing the geometric tools.
- DOI
- 10.2307/1926830
- Volume
- 43
- Issue
- 1
- Pages
- 27
- Sources
- openalex crossref