Do households react to policy uncertainty by increasing savings?

Abstract

Studying the impact of policy uncertainty on household savings is essential to understanding how policymaking affects households’ economic behavior. Previous studies suggest that policy uncertainty could dampen consumption and encourage savings. However, these studies did not consider the effects of the business cycle and endogeneity and the roles of financial development and institutional quality in the uncertainty-saving nexus. Using quarterly data from 21 countries from 1987–2021, we find that a one-standard-deviation rise in policy uncertainty increases household saving rates by three percentage points within six quarters. This effect persists even after accounting for the business cycle and endogeneity. In addition, high financial development and institutional quality mitigate the policy uncertainty effect on savings by about 1.1 and 0.7 percentage points, respectively. This study enriches the study on policy uncertainty and household savings while also providing new insights to better identify the impact of policy uncertainty.