What Determines Saving Rate in Korea?: The Role of Demography

Abstract

This paper investigates to what extent do income growth and uncertainty, and demographic factors affect the domestic real saving rate in Korea. We test an extended life cycle hypothesis and demography hypothesis with the Korean aggregate time series data from 1975 to 2002. The results of the tests show that the aggregate saving rate is positively affected by the moving average of the growth rate of output and the variance of the output growth rate. The positive effect of the output growth rate differs from the negative effect we found with households survey data. The young age and the elder dependency ratios have negative effects on the saving rate, suggesting that the age structure of the population has impact on aggregate saving rates. Also, the foreign saving is found to be a substitute of domestic saving. The elasticities with respect to a change in individual determinants are low. The projected changes in the dependency ratios are associated with a reduction in the domestic saving rate. All other things being equal, the domestic saving rate is projected to fall from 40 percent in 2002 to about 26 percent by the year 2030.