Decrease in Household Savings Rate and Effectiveness of Monetary Policy
Author: Chung, Kyuil(Institute for Monetary and Economic Research, Bank of Korea)
Amid a sharp decline in the household savings rate after the financial
crisis, the volatility of consumption has increased to a level exceeding that of
GDP. Although various factors underlie the increase in the volatility of
consumption, there is a likelihood that an increase in the number of
households living without savings, hand-to-mouth, has had a persistent
influence on it.
This paper divides the household sector into two groups: optimizing
households and hand-to-mouth households, depending on whether the
household has savings, and then analyzes what impact the increase in the
ratio of hand-to-mouth households has on the transmission lag and the
effectiveness of monetary policy.
According to the simulation, the rise in the ratio of hand-to-mouth
households leads to the increased effect of interest rate cut on consumption
in the early stage but the increased volatility of consumption.
The result demonstrates that it is more effective for the central bank to
respond actively to inflation rather than to output in alleviating the volatility
of cousumption, because the volatility of consumption is reduced if real
wages are stabilized through price stability.