Saving and the real interest rate in LDCs

Abstract

This paper provides emperical evidence on the question of whether savings respond positively to changes in the real rate of interest in LDCs, exploiting some of the implications of the neoclassical theory of consumption. In the first section, it is shown that the emperical success of the high interest elasticity hypothesis can be traced down to the presence of cases of financial reforms in the sample. The second section offers evidence on the elasticity of intertemporal substitution in consumption. The results from both sections point to the presence of very low intertemporal substitution elasticity, as well as negligible responses of aggregate saving to the real rate interest.