Consumption and savings in a low interest-rate environment

This paper studies consumption and savings decisions of Danish households before and during the financial crisis as well as in the more recent years characterized by negative policy rates. While all household groups decreased their consumption ratios immediately in response to the financial crisis, net savers have increased their consumption ratios to pre-crisis levels again. Net borrowers, in particular those with high gross debt, have increased their speed of consolidation further during recent years. This indicates that household balance-sheet adjustment is a relatively long process, which has extended into the beginning of the recent economic upturn. Further, we estimate the marginal propensity to consume (MPC) out of increasing housing wealth over one year to be around 4-6 per cent. Younger and more levered households have a larger MPC out of housing wealth, suggesting that collateral effects may play a role. The MPC is asymmetric; households adjust their consumption more in response to negative housing wealth shocks than to positive. Finally, we simulate an increase in interest rates at the household level, and find that the impact of the implied changes in liquidity on overall consumption is modest. However, the interest-rate sensitivity is considerably higher for at-risk groups, such as households with large debt and adjustable-rate mortgages.