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In Financial Market, Public Policy, and the East Asian Miracle by Stiglitz and Uy (World Bank Research Observer, vol. 11, no.2, 1996), the authors state that:

Lowering interest rates transfers incomes from households to corporations, and because the corporate sector has a higher propensity to save, aggregate saving increases.

Why does lowering interest rates benefit corporations over households? Is this presupposing that households are net savers, not net borrowers, and that corporations are the opposite?

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  • $\begingroup$ Hard to know what they mean by this. Could you post more context? It seems that your guess about their assumption is the right one: households receive $i\cdot D$ and corporations receive Profits-$i\cdot D$, where $i$ is interest and $D$ is net borrowing of corporations from households. In that context, lower i increases net corporate profits, and if corporations save their profits at a higher rate than households then aggregate savings increases. However, households are presumably the owners of the corporations (!) so the model they have in mind is hard to make out. $\endgroup$ – Fix.B. Mar 17 '16 at 18:23
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A student of mine came up with a very plausible explanation for this statement. I think he's almost certainly on the right lines.

  • Low interest rates encourage consumption spending and discourage saving. (They might also encourage people to take out loans to fund consumption spending.)

  • Consumption spending transfers money from households (who are buying goods/services) to corporations (from whom they're buying).

  • These corporations are assumed to save at a higher rate than households (see the quote in the question), so increased corporate savings more than offset the decrease in household savings.

It's obvious once you think about it!

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  • $\begingroup$ One issue with this explanation is that the original argument aims to show that aggregate saving increases, but with this logic, saving decreases ... therefore it increases? I'm not sure that makes sense. $\endgroup$ – Fix.B. Mar 18 '16 at 20:14
  • $\begingroup$ @Fix.B.: The key part of the argument is in the question: consumer saving falls but corporate saving (which is assumed to happen at a higher rate) more than makes up for this. $\endgroup$ – LondonRob Mar 22 '16 at 13:47
  • $\begingroup$ You are right, I think that's all they mean. My guess is that with lower interest rates would in theory also mean that corporatins don't want to save either. However, corporations are saving a lot naw-a-days, even though rates are 0...so reality doesn't seem to fit that part of the theory. $\endgroup$ – Fix.B. Mar 29 '16 at 18:30

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