Low or even negative interest rates can either cause households to reduce their savings (substitution effect) because of lower rewards, or to increase their savings (income effect) to maintain their financial income. Our analysis shows that for every drop by 1 percentage point in interest rates, savings rates increased by 0.2 percentage points in Europe. Using a balanced panel data sample, we assessed the savings behavior of households in 16 countries in the European Union from 2000 to 2018.

Other factors than monetary policy have a much bigger impact on savings behavior, namely demographics (old-age dependency ratio), with an effect of 0.4pp; public social expenditures (-0.7pp) and in particular health expenditures (-1.5pp). With a rapidly aging population across Europe, prolonged life expectancy fosters continued savings, even in retirement. Secondly, a weak welfare state encourages precautionary savings. Finally, high health expenditures further encouraged to save.

Low or even negative interest rates by themselves will not magically increase consumption or make savings more productive i.e. less no-yielding deposits and more high-yielding risky assets such as equities, or real estate. An overhaul of the institutional set-up, first and foremost regarding the pension and tax systems is indispensable for monetary policy to be more effective.