Discussion paper

DP12111 Excess saving and low interest rates: Theory and empirical evidence

The debate on low real long-term interest rates is dominated by the loanable funds theory (LFT). 'Excess saving', above all due to demographic factors, is regarded as a primary cause of low rates. In this paper, we show that LFT is not an appropriate theoretical framework. It is based on a commodity paradigm ('real analysis') which cannot represent a financial system with a flow of funds consisting of money. In a 'monetary analysis' saving is disconnected from the supply of funds. Funds are provided by banks, which create money, and investors that are willing to give up liquidity. A simple model which is based on 'monetary analysis' is the IS/LM-model. In this model, even at the zero lower bound 'excess saving' is not possible. The empirical evidence for 'excess saving' is weak. At the global level and for the United States the net saving rate and the gross household saving rate have declined significantly since the 1980s. In line with the monetary analysis, a 'financing glut' can be identified for the United States for the period preceding the Great Recession. It was followed by a 'borrowing dearth'. For the postwar period, the real rates of the early 1980s can be identified as an outlier, and thus the trend decline since this period can be regarded as a reversion to the mean.


Bofinger, P and M Ries (2017), ‘DP12111 Excess saving and low interest rates: Theory and empirical evidence‘, CEPR Discussion Paper No. 12111. CEPR Press, Paris & London. https://cepr.org/publications/dp12111