Abstract
This note aims to shed light on the relationship between interest rates and household savings in Norway. To this end, I use a simple life-cycle model that accounts for actual debt levels of Norwegian households. The starting point is that since Norwegian households tend to have negative net financial wealth, a low interest rate makes them better off. In a nutshell, reduced interest rate payments can be viewed as a transitory income increase. When households wish to smooth consumption, only a small fraction of the transitory income gift will be consumed, while most of the reduced income payments will be saved for consumption in future periods. Hence, a life-cycle model is able to explain why households increase savings when interest rates are low.