The macroeconomic effects of excess savings

Abstract

We study how excess savings affect consumption and propagate through the macroeconomy, which permits us to evaluate the contribution of excess savings to post-pandemic inflation in the U.S. In partial equilibrium, the aggregate spending response depends on the initial distribution of excess savings and the cross-sectional heterogeneity in marginal propensities to consume. In general equilibrium, canonical RANK, TANK, and HANK models make markedly different predictions about the macroeconomic consequences of excess savings even if household wealth follows nearly identical paths. A quantitative HANK model matches the decumulation of the excess savings built up during the COVID-19 pandemic across the income distribution. The model attributes about a third of the trough-to-peak change in inflation to demand fueled by excess savings.