Why Do Norwegians Increase Their Savings When the Interest Rate Is Cut?

Abstract

This note aims to shed light on the relationship between interest rates and household savings in Norway. To this end, I use a simple life-cycle model that accounts for actual debt levels of Norwegian households. The starting point is that since Norwegian households tend to have negative net financial wealth, a low interest rate makes them better off. In a nutshell, reduced interest rate payments can be viewed as a transitory income increase. When households wish to smooth consumption, only a small fraction of the transitory income gift will be consumed, while most of the reduced income payments will be saved for consumption in future periods. Hence, a life-cycle model is able to explain why households increase savings when interest rates are low.