In prosperous periods, savers tend to pay little heed to the modest variations in interest rates offered by banks. Yet when the economy begins to falter, this behaviour changes dramatically. The study finds that households become far more alert and deliberate, actively combing through the market in search of better returns. At the individual level, this seems like a rational and prudent move—tightening budgets and maximising returns when times are tough. However, the research reveals a paradox at the macroeconomic level: by locking in higher savings rates during recessions, households as a group may unintentionally sap spending power from the broader economy, worsening the downturn.
Published in the American Economic Journal: Macroeconomics, the study combines extensive UK banking data with an economic model designed to capture this behavioural pattern. The findings suggest that during periods of economic contraction—when unemployment is rising and base interest rates are low—households make more efficient financial choices than in boom times. In particular, they are significantly more successful at identifying and switching to accounts with the highest available rates. While this heightened attentiveness benefits individuals, it also amplifies fluctuations in aggregate demand. The researchers estimate that this increased focus on savings during downturns makes swings in consumer spending roughly 14% more extreme than they would be if attention to interest rates remained constant across the business cycle. In essence, the collective impulse to “make every pound count” translates into reduced consumption precisely when the economy can least afford it.
Dr Alistair Macaulay, the study’s author and a Surrey Future Fellow in Economics at the University of Surrey, explained the broader implications of this behaviour. “For many families, seeking out better savings rates during tough times is a perfectly understandable reaction. Yet when millions of households adopt the same strategy, it can inadvertently deepen the slump,” he said. “My research highlights how even small, seemingly rational financial decisions can combine to magnify the ups and downs of the economy.”
Dr Macaulay emphasised that improved access to transparent, comparable financial information could help mitigate these effects. His modelling indicates that halving the so-called ‘information cost’—the effort required for consumers to identify and compare savings products—could reduce the volatility of consumer spending by approximately 11%. Such a reduction could make the economy more stable and resilient in the face of future shocks, dampening the self-reinforcing cycle of reduced spending and deepening recession.
The findings carry important lessons for policymakers and financial regulators. While encouraging financial literacy and responsible saving remains a cornerstone of sound economic policy, the research underscores that the aggregate consequences of individual actions can sometimes run counter to collective welfare. Making financial information more accessible could help households make better-informed choices without inadvertently intensifying economic stress. The study thus adds a nuanced perspective to our understanding of consumer behaviour in recessions—showing that prudence, though individually beneficial, can collectively pull economies into deeper slumps.
In sum, the University of Surrey’s research sheds new light on the complex interplay between micro-level decision-making and macroeconomic outcomes. It highlights how even well-intentioned financial choices, such as searching for higher savings rates, can ripple through the economy in unexpected ways. By improving information transparency and reducing barriers to comparison, policymakers could soften these unintended consequences—ensuring that the instinct to save wisely does not come at the expense of broader economic stability.
More information: Alistair Macaulay, Cyclical Attention to Saving, American Economic Journal Macroeconomics. DOI: 10.1257/mac.20220311
Journal information: American Economic Journal Macroeconomics Provided by University of Surrey