Interest rate and age effects on consumer behavior - Evaluating the effectiveness of interest rate policy

Abstract

Over the last decade several central banks have chosen to follow a policy of steadily lowering interest rates in order to stimulate consumption and investment, as well as to reach inflation targets. In the scope of this central bank policy trend, in this paper, differences in investment and consumption behaviour of differently aged individuals are examined. Analysis is conducted mainly using OLS regressions on statistical data from the Fed´s (Federal Reserve) triennial Survey of Consumer Finances. Firstly, the relationship between interest rates and savings behaviour is looked into, and is found to be positive. Secondly, age effects on investment and consumption behaviour are investigated. It is found that investment and consumption behaviour differ depending on the age of the individual. The aim of this thesis is to evaluate the effectiveness of the above described central bank policy trend, and discuss the implications of the policy for a country´s economic stability.