Unformatted text preview: ssbook savings rate (interest earned on
savings accounts) was capped at 5 and then 5.25 percent. Th e 1980 Act deregulated interest rates,
allowing banks more freedom to set savings rates and to compete for deposits. Given your analysis
above, how well do the data in the chart correspond to the predictions of our simple model?
Our comparative statics tell us that savings are positively related to interest rates. Prior to 1980,
the correlation between the savings rate and the interest rate was positive, but relatively weak.
After deregulation, the correlation is much stronger, 0.71 , which is what our simple two model
would predict. When interest rates fall, savings rates decline.
n Figure 1 Figure 2...
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- Fall '07
- Supply And Demand, Stock and flow, Saving