Objectives
Question:
Discuss about the Impact of Australian Real Interest Rate on Household Savings.
Preliminary Review
As finance student understanding the impact of the rate of interest as well as savings behavior is critical for my daily operations. Understanding of real interest rate is important for a banker as it performs various important function which in turn influences major economic decisions in a country like Australia. But the content of this study looks deeply into one function of interest rate which is its influence on how households in Australia allocate income in relation to present consumption and future consumption. Based on the effect of intertemporal decisions on economic growth, various studies have been done on the significance of interest rate as a well as related policies. However the researchers have not come to common ground on the impact of rates of interest on various other important macro and micro economic variable. Moreover, there has been no agreement on the impact of economic variable known as savings. The relationship between rate of interest as well as household savings rate has been a debate over the past with no agreement between various studies. The impact of interest rate on household savings rate as matter of fact has been debated compared to the relationship between rate of interest and other factors. Based on this long debate, rate of interest responsiveness in relation savings clearly becomes a parameter crucial importance in understanding economic as well as financial issues. The central question is how interest rate is related to household spending and how monetary policies impacts saving and rate of consumption. This current study investigates how interest rate impacts how various households in Australia monetary consumption in present time and future.
Scope of Study
This current study will focus on the relationship between rate of saving in Australia and the rate of interest. This research paper will discuss about the impact of the interest rate on households’ rate of saving in Australia. Over the recent past Australia has shown strong reliance on the face of external financial and economic externalities (Harris, Loundes & Webster, 2012). Australian economy has shown economic growth which is dependent to ball sectors including savings. To come up with a proper research, this study will rely on secondary data as source of information on saving behavior and as well as the interest rate. This secondary source of information will be obtained from the Australian Bureau of Statistics located on the link https://www.abs.gov.au/Finance, which has information on the general economic indicators, including interest rates (Girouard, Kennedy & Andre, 2006). The data is publicly available and will be downloaded and relevant data obtained and used for the purposes of this study.
The study will also utilize various literatures review to come up with a proper discussion of the impact of the rate of interest on Australians household saving rate. These sources of literature are as follows:
The real exchange rate and economic growth (Rodrick, 2008)
This article investigates how currency undervaluation through high real exchange rate stimulates the growth of the economy and thereby, influences spending and savings decisions by persons and households and will help in broadly understanding the general principles of economic factors and spending/ savings.
Literature Review
Household balance sheets and debt: an International Country Study (Isakssen et.al 2014).
This article will be useful for this research because it investigates how household debt, income, and wealth impacts savings and spending in the context of macroeconomic indicators, including real interest rates and inflation.
Demographics and real interest rates: inspecting the mechanism (Carvalho, Ferrero, & Nechio, 2016).
This paper discusses an important mediating factor in household savings, which is demographics is an important variable in household savings.
Research Objectives
This study aims at achieving one main objective, however other objectives must as well be considered to ensure that findings are very precise with what the researcher will be trying to find out. Here are some of the objectives which are essential to be achieved for the purpose of completing the ultimate goal of conducting this research which as follows;
- To investigate the relationship between interest rate and savings in Australia.
- To study the relationship between rate of returns on Australian household savings.
- The impact of interest rate on household savings in Australia.
Problem Statement
There is a close relationship between interest rate and Australian household savings. Based on this relationship, it has been demonstrated that interest rate has a greater impact on how Australian households consume their money in present and future. To derive to this statement the study investigates Australian interest rate as well as household rate of saving using their saving behavior and Australian data.
Research Question
How does the real interest rate in Australia affect household savings and what are the intervening factors and theories in this relationship?
Research Hypothesis
This research will uses the null alternate hypothesis format where the null stands for a no significant impact or relationship and alternate demonstrates a significant impact or relationship. This research hypothesis is as follows:
Hypothesis one:
H1.1: There is no relationship between interest rate and household saving in Australia.
H1.2: There is a close relationship between rate of household saving and interest rate in Australia.
Hypothesis two:
H2.1: The rate of interest has no impact on the Australian household saving rate.
H2.2: the rate of interest has an impact on the Australian household saving rate.
Theoretical Framework
This current study will be conducted a model of dependent variable as well as independent variable. The dependent will be main interest of the whole research while the independent variable is the one which influences the dependent variable where the dependent variable will be rate of saving while independent is the rate of interest.
Interest Rate and Households’ Saving
There is a positive relationship between real interest rate and households’ savings in Australia as well as other parts of the world (Carvalho, Ferrero, & Nechio, 2016). The selected studies indicates that an increase in the interest rate results into an increase in the rate of households ‘savings. According to the writers schools of thought it is evident that at high rates of interest Australian households tend to save more compare to the times when real interest rates are very low (Isaksen et.al 2014). The writers however defines the real rate of interest in many terms as lending rate, deposit rates and have applied this two definition in their studies as the proxy for interest rate and this will be applicable to the current study too (Debelle, 2004). When the rate of interest is increased using various government economic formulated policies, the Australian households are encouraged to make more savings as well as to consume less while earning more return on deposits. This indicates the relationship between the two variable households’ saving behavior and real interest rate (Rodrik, 2009). On the other hand when the government policies decreases real interest rate majority of the Australian households tend to consume more and save less as there is low deposit rate to be enjoyed by these households. This indicates the positive relationship between the two variables leading the impact as discussed below.
Dependent and Independent Variables
The Impact of Interest Rate on Australian Households’ Saving
According to the selected studies for literature review, there is a suggestion an evidence of an impact on Australian household posed by interest rate. This issue has formed the stem of financial debate on liberation policies, which is used to achieve savings, investment as well as economic growth (Debelle, 2004). According to the selected studies, the issues of interest rate responsiveness on saving is crucial and relevant to Australian economic growth (Callen & Thimann, 2007). The author of the selected study reviews in their schools of thought demonstrates that proponents of interest policies argue that real interest rate is one of the key strategies which can be used to control resources and stimulate savings. Based on this studies this policy of interest rate have been applied in various countries but there is no evidence of success based on its application with other strategies (Bloom, Canning & Graham, 2003). The studies indicate that household in Australia respond to the increase and decrease in the real interest rates. These studies indicate a deferred consumption at high real interest rates and an increase saving in Australia. There is low savings in Australia at the point of low real interest rates (Feldstein & Horioka, 2009). From this studies it can be concluded that real interest rate in Australia has an impact on the household saving where at high interest rates, Australian households save more compared to low rates in real interest.
Introduction
In this chapter the research will discuss various issue relating to data used for the research. The discussion under this chapter will include the design, data collection and interpretation. This research utilized secondary data as data collection method in order to arrive at the study objectives.
research Design
The research design is the blueprint of data collection procedure which is crucial in obtaining the required research information. The researcher used secondary data to complete the study. The data was downloaded online form the government accessible portal and analyzed.
Data Collection
Secondary Data
The data collected to be used in this study is by the means of secondary data. According to previous studies, secondary data is that data collected for a study but is purposed for more than one problem at hand (Girouard, Kennedy & Andre, 2006). This type of data can be located as soon as it is required, it is less expensive and obtained in already existing sources such government portals. The date analyzed in this study was obtained from government portal in relation to household expenditure survey. The rate of interest as well as consumer behavior in Australia are all in the government portal.
Data Analysis
The researcher employed qualitative analysis on the obtained data, this method is suitable for analysis of all type of data and can perform variety of data analysis and presentation functions. This method of analysis helped the researcher to analyze the already obtained data to identify the relationship and the impact of interest rate on household saving
References
Bloom, D. E., Canning, D., & Graham, B. (2003). Longevity and life?cycle savings. The Australian Journal of Economics, 105(3), 319-338.
Callen, T., & Thimann, C. (2007). Empirical determinants of household saving: evidence from OECD countries.
Carvalho, C., Ferrero, A., & Nechio, F. (September 01, 2016). Demographics and real interest rates:Inspecting the mechanism. European Economic Review, 88, 208-226.
Debelle, G. (2004). Household debt and the macroeconomy.
Feldstein, M. S., & Horioka, C. Y. (2009). Domestic savings and international capital flows.
Girouard, N., Kennedy, M., & Andre, C. (2006). Has the rise in debt made households more vulnerable?.
Harris, M. N., Loundes, J., & Webster, E. (2012). Determinants of household saving in Australia. Economic Record, 78(241), 207-223.
Isaksen, J., Kramp, P. L., Sørensen, L. P., & Sørensen, S. V. (January 01, 2014). Household Balance Sheets and Debt: An International Country Study. In: Winkler B., Riet A.., Bull P. (eds) A Flow-of-Funds Perspective on the Financial Crisis. Palgrave Studies in Econmics and Banking. Palgrave Macmillan, London
Jappelli, T., & Pagano, M. (2014). Saving, growth, and liquidity constraints. The Quarterly Journal of Economics, 109(1), 83-109.
Rodrik, D. (May 01, 2009). The Real Exchange Rate and Economic Growth. Brookings Papers on Economic Activity, 2008, 2, 365-440
Worthington, A. C. (2006). Debt as a source of financial stress in Australian households. International Journal of Consumer Studies, 30(1), 2-15.
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