The psychology of consumer spending in a low-interest-rate environment is influenced by several factors that impact individual and collective decision-making. In such an environment, consumers may be more inclined to spend rather than save due to the reduced cost of borrowing and the diminished returns on savings. This can lead to increased consumption and investment, driving economic growth.

One psychological factor at play is the concept of present bias, where individuals place greater value on immediate rewards than future benefits. With low interest rates, the opportunity cost of spending money now, rather than saving or investing it, is reduced. As a result, consumers may be more likely to make purchases and take on debt to fulfill their immediate desires.

Moreover, the wealth effect can also influence consumer behavior in a low-interest-rate environment. When interest rates are low, asset prices, such as stocks and real estate, tend to rise. This can make consumers feel wealthier, leading to increased confidence and a willingness to spend more.

Additionally, low interest rates can impact the perception of financial security. Individuals may feel less pressure to save for retirement or emergencies when the cost of borrowing is low, leading to higher levels of discretionary spending.

For example, during periods of low interest rates, we often observe increased spending on big-ticket items such as homes, cars, and durable goods. This is because the cost of financing these purchases becomes more affordable, incentivizing consumers to take on debt to acquire these assets.

References:

• Thaler, R. H., & Shefrin, H. M. (1981). An economic theory of self-control. Journal of Political Economy, 89(2), 392-406.
• Case, K. E., & Shiller, R. J. (2003). Is there a bubble in the housing market? Brookings Papers on Economic Activity, 2003(2), 299-362.
• Romer, C. D., & Romer, D. H. (2019). New evidence on the aftermath of financial crises in advanced countries. American Economic Review, 109(4), 1231-1259.