Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/323203 
Year of Publication: 
2025
Series/Report no.: 
arqus Discussion Paper No. 291
Publisher: 
Arbeitskreis Quantitative Steuerlehre (arqus), Berlin
Abstract: 
We set up a life cycle model with real interest rate risk to demonstrate that real interest rates have implications for optimal household consumption and investments. Lower interest rates lead to higher optimal stock investments and lower consumption. Ignoring the time-varying nature of real interest rates leads to overconsumption and underinvestment into stocks when interest rates are high and, ultimately, substantial welfare costs. Being exposed to an extended period of low interest rates even leads to substantial welfare losses when behaving optimally - particularly when being exposed to it at around retirement age when savings peak.
Subjects: 
consumption-savings decisions
real interest rate risk
life cycle model
household finance
JEL: 
E21
G11
G51
Document Type: 
Working Paper

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