Economic and behavioral determinants of forced household savings during the COVID-19 pandemic

This study seeks to identify the determinants of forced household savings in 16 European Union (EU) member states in 2020. We show that the higher the severity of the COVID-19 pandemic in the state, measured by the intensity of government restrictions or the number of COVID-19-related deaths, the higher the level of forced savings. Such savings also increased with gross domestic product per capita and the financial support provided for households and enterprises by the government. Additionally, savings cultures and personality traits that support compliance with pandemic-related restrictions and enhance coping with the hardship of the pandemic had a positive impact on forced savings. Our results show that while common pandemic shock may lead to discrepancies in forced savings in affected countries, their level depends largely on government response in the form of imposed restrictions as well as financial support for households and enterprises. Therefore, strong fiscal support during the pandemic can be likened to sowing the seeds for post-pandemic recovery, as savings accumulated during the pandemic shock may be used to finance the pent-up demand. This, in turn, suggests that fiscal responses during the pandemic may act as a significant driver of post-pandemic business cycle (de)synchronization and inflation differentials among EU member states and, more importantly, euro-area countries.