Private Savings Rate Research Articles

The determinants of private savings in Turkey: The role of financial development

Purpose ― Over the past two decades since the 2000s, Turkey's private savings rates have decreased, which has become a concern for policymakers. In addition to considering the key determinants of private savings, this study primarily aims to quantify the linear and nonlinear impacts of financial development on private savings from 1980 to 2015. Method ― This study uses Autoregressive Distributed Lag (ARDL) procedure and the Fourier Toda-Yamamoto causality framework. Findings ― The main findings are as follows: 1) The ARDL bounds test supports the presence of a long-run equilibrium relationship between private savings and its determinants; 2) Financial development affects private savings nonlinearly in an inverted U-shaped pattern, and 3) No causality relationship is observed between private savings and financial development. Implication ― As financial development has an inverted U-shaped relationship with private savings, indicating that the complementary effect of financial development is replaced with a substitution effect after a certain threshold level, Turkish authorities should consider this evidence when tailoring policies regarding financial markets. Originality ― This study is the first to identify whether the relationship between private savings and financial development is linear or nonlinear in the context of an emerging economy in Turkey.

Wealth Inequality and Private Savings: The Case of Germany

This paper explores the interaction between corporate ownership concentration and private savings, and by extension, the current account balance in Germany. As high corporate savings largely reflected capital income accruing to wealthy households and increasingly retained in closely-held firms, the buildup of external imbalances in Germany has been accompanied by widening top income inequality, rising private savings and compressed consumption rates. Rising corporate profits in an environment of high business wealth concentration account for 90 percent of the rise in the private savings rate and a third of the increase in the German current account surplus over 1999–2016.

Wealth Inequality and Private Savings

This paper explores the interaction between corporate ownership concentration and private savings, and by extension, the current account balance in Germany. As high corporate savings largely reflected capital income accruing to wealthy households and increasingly retained in closely-held firms, the buildup of external imbalances in Germany has been accompanied by widening top income inequality, rising private savings and compressed consumption rates. Rising corporate profits in an environment of high business wealth concentration account for 90 percent of the rise in the private savings rate and a third of the increase in the German current account surplus over 1999–2016.

Understanding domestic savings: an empirical approach

ABSTRACTThere are two unusual and important features in the evolution of the savings rate in Chile. First, the economy increased the average savings rate by 11 percentage points in the period 1985–2013 compared to 1960–1984, mainly due to a large change in private savings rate (10 percentage points), and an additional 1 percentage point from the public sector. The second feature is related to the change in the composition of private savings. After several years of nearly no corporate savings, this component became an important part of total savings reaching an average of almost 10% of Gross National Disposable Income (GNDI) during the period 1986–2012. Our results show that the 1984 tax reform, the boost in the marginal productivity of capital and the deepening of the financial market were the main drivers that explain the dramatic increase in corporate savings. We also found that the reduction in personal income tax after the tax reform and the higher income per capita growth helped to explain the increase in household savings, while the structural balance rule helped to explain the increase in public savings.

The Effect of Increasing the Early Retirement Age on Savings Behavior Before Retirement

Facing a reduction in pension generosity, individuals can compensate the loss by working longer or saving more. This paper shows that the impact of changes in pension generosity on saving crucially depends on the possibility of prolonging future employment. Exploiting across cohort variation in expected pension wealth induced by a 3-year lift in early retirement age for women born after 1951 in Germany, we show evidence of a reduction in private savings rate and an increase in leisure consumptions in case of strong responses in future labor earnings.

Determinants Of Savings Behavior In Pakistan: Long Run - Short Run Association And Causality

AbstractThe existing studies on private savings have mostly investigated the long run and short association of different variables with private savings, whereas no known study has investigated both long run and short run causality of variables against private savings by using data of Pakistan. The current study used time series data of Pakistan over the period of 1972 to 2012 and employed long run cointegration test, first normalized equation for long run association, vector error correction model for short run association, Toda Yamamoto technique for long run causality and Granger causality test for short run causality. The results suggest that GDP per capita, inflation rate, financial development, dependency ratio and fiscal development have impact on the private savings rate in Pakistan. The findings of the current study can be used to increase the private savings’ rate. In the long run government can increase the private savings by controlling fiscal deficit and promoting the investment by private investors. Whereas, in the short run, government can increase the deposit rate to increase the private savings. The current study is unique in its nature as it simultaneously provides the long run and short run causality and association and can contribute significantly in improving savings rate in developing economies like Pakistan.

English

The issue of whether public savings offset private savings, and visa vice, has important implications for the effectiveness of fiscal policy. This study examines long-run relationship between public and private savings rates using annual Turkish data for the period 1975-2005. The result of Engle-Granger cointegration test has shown that there is no long-run relationship between private and public savings ratios. However,once endogenously determined structural break is allowed, the test results confirm the existence of the cointegration relationship between private and public savings. Econometric estimation of the offset coefficients using both FMOLS and DOLS yields values of between -0.11 and -0.82. The results also indicate that the potency of fiscal policy significantly reduced with the liberalization of financial markets.Keywords: Savings, Offset coefficient, Ricardian Equivalence, DOLS, FMOLS. JEL Classificiation: E6, H6, E21

English

After the liberalization of capital account in 1989 in Turkey, speculative capital inflows have significantly come for the higher interest rates induced by incremental budget deficits in Turkey. While the budget standing has got closer to balance, current account deficit problem has kept its agenda. Thus, a new potential determinant of current account, namely the gap between private savings and investment is proposed recently. Therefore, the study explores the determinants of net private savings and investment gap along with the effect of oil price shocks on them before and after the 2001 crisis. The reason of introducing the oil price as an additional variable to the model is to explain the effect of oil prices on current account deficit through the private savings and investment gap. For this purpose, the bound testing approach to cointegration within an autoregressive distributed lag (ARDL) framework and error-correction model (ECM) methodology, is applied for the period of 1990: Q1-2007:Q3. Expected empirical results provide evidence of the simultaneous effectiveness of interest rate for deposit, GDP growth, and oil price on net private savings rate in both short and long runs.   Key words: Oil prices, savings - investment gap, autoregressive distributed lag (ARDL).

To Save Or To Spend: That Is The Tax Question?

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">While the effects of interest rates on consumption and savings has always been a concern to economists, there is still a great debate regarding the magnitude of the after-tax interest rate effect on savings. The response of consumption and savings to such changes in after tax interest rates potentially alter the United States private savings rate, which may influence our economic growth. While the Federal Reserve has executed the most aggressive expansionary monetary policy in history by lowering the Federal Funds interest rate by more than 10 times in the past year in an attempt to increase consumption to rebound from the current recession, this may ultimately reduce savings.<span style="mso-spacerun: yes;">  </span>If savings fall, it potentially reduces our ability to spend in the future? In Solow's Growth model, the biggest determinant of future growth in an economy is the savings rate. The current savings rate in the US is at an all time low and is much lower than that of other nations, such as Germany and Japan. So, how can policy makers increase savings in the US? Can the U.S. increase savings by lowering the capital gains tax rate, which changes the after tax return on capital investment? If so, how effective will President Bush's proposed capital gains tax cut be on altering our savings rate?<span style="mso-spacerun: yes;">  </span>To better understand after-tax interest rate effects on savings, one needs to discover the interest elasticity of savings to different types of taxes, such as capital gains and consumption taxes. If the private savings rate is sensitive to the after-tax interest rate return, then a capital gains tax, income tax, and sales tax will have very different effects on savings. The more sensitive the savings rate is to the after tax interest rate, the more an increase in the after tax interest rate will cause an increase in savings.<span style="mso-spacerun: yes;">  </span>To assess the current interest elasticity of consumption/savings on the after tax real return of interest, I build on Boskin's (1978) model with a simultaneous equations model and more recent data. Specifically, I estimate the log of consumption on wealth, unemployment, interest rates, and disposable private income, and the after tax return of the Moody's AAA Bond Rate. To avoid the potential endogeneity bias between these variables, I use a simultaneous equation approach. Results will help determine if the U.S. can increase its savings by lowering the tax rates on investment. In general, this paper finds that the elasticity of substitution is close to .2, which suggests that the elasticity of substitution is quite small and stable. As Feldstein suggests this shows that a reduction in an income or sales tax will generate greater savings than a reduction in the capital gains income tax. </span></p>

Sustainable debt and deficits in Emerging Markets

Rising deficits and high debt ratios characterised currency crises in countries with low private savings rates and low population densities. But in emerging markets with large population transferring to more productive employment, sustainable debts and deficits may be higher. Debt ratios fall with growth rates. Higher private savings can compensate for government dissaving. An optimising model of such an economy with dualistic labour markets and two types of consumers demonstrates these features but also shows debt ratios tend to rise in high growth phases. Policy conclusions for fiscal consolidation and coordination with monetary policy are derived in the Indian context.

Understanding the Sources of Friction in U.S.-China Trade Relations: The Exchange Rate Debate Diverts Attention Away from Optimum Adjustment

China has been accused exchange rate manipulation that has caused large U.S. trade deficits, which have reduced U.S. welfare by increasing unemployment and reducing wages. In addition, the strong claims by some observers that the trade imbalances are deeply deleterious to China's welfare almost make it a moral imperative for the United States to use tariffs to force an RMB appreciation for China’s own good. The truth, however, is that: - The claim that a 40 percent appreciation of the Renminbi (RMB) against the US$ would reduce the U.S. global trade deficit represents the triumph of hope over experience. When the average Yen-US$ exchange rate fell from 239 in 1985 to 128 in 1988, the U.S. global current account deficit only fell from 2.1 percent to 1.7 percent of GDP because Japanese companies started investing abroad and exported to the U.S. from there. For similar reasons, a large RMB appreciation would not reduce the U.S trade deficits significantly. - The claim that China’s swelling balance of payments surplus had caused the People’s Bank of China (PBC) to lose some control of credit growth is wrong. Chinese banks face credit quotas, and credit growth could not have stayed high in 2003-2007 without continual upward adjustments of the credit quotas by the PBC. The reason is not technical inability to control money growth but the political reality of factional politics. - The alleged negative effects on U.S. labor from the trade imbalances are greatly exaggerated. The average unemployment rate in 1999-06 was 5 percent compared to 6 percent in 1991-98; and the total compensation (including benefits) for blue-collar workers rose in the 1991-06 period. Beside accelerated globalization, accelerated technological innovation was another important trend in this period. The latter produced large productivity gains that enabled labor income to rise despite the greater competition from imports. These two trends caused more frequent job turnovers, which increased worker anxiety, and hence demand for protection. China’s current account surplus exists because its dysfunctional financial system cannot intermediate the growing savings into investments. The private savings rate is high because China does not have the variety of financial institutions that would, one, pool risks by providing medical insurance, pension insurance, and unemployment insurance; and, two, transform savings into education loans, housing loans, and other types of investment loans. The backward financial system in China has made the private savings rate in China 7.0 to 12.2 percentage points higher than in the U.S. The optimum solution to the present trade tensions is a policy package that emphasizes multilateral actions. It is bad economics and bad politics to focus on only one party (China alone must change), on only one instrument (RMB appreciation alone), and on only one policy objective (current account balance).

Savings and Growth in Bangladesh

Savings and growth are often strongly correlated. Thus, it is important to study the determinants of savings and the direction of causality between savings and growth as these have important implications for development policy. Yet, careful empirical studies on savings behavior are missing for Bangladesh. Thus, in this paper, we estimate the long-run total and private savings functions for Bangladesh using recent time series techniques. We find that the total savings rate is mainly determined by the GDP growth rate, dependency ratio, interest rates and bank density. The private savings rate is also affected by the public savings rate. Further, using the Granger Causality tests, we find that in Bangladesh, there is a bi-directional causality between savings and growth. We also carry out the Forecast Error Variance Decomposition (FEVD) analysis using the VAR framework. The FEVD results confirm the causality results obtained using the Granger causality tests as well as the estimated savings functions.

The Overstretch Myth: Can the Indispensable Nation Be a Debtor Nation?

Would-be Cassandras have been predicting imminent downfall of American imperium ever since its inception. First came Sputnik and the missile gap, fol lowed by Vietnam, Soviet nuclear parity, and Japanese economic challenge a cascade of decline encapsulated by Yale historian Paul Kennedy's 1987 overstretch thesis. The resurgence of U.S. economic and political power in 199os momentarily put such fears to rest. But recently, a new threat to sustainability of U.S. hegem ony has emerged: excessive dependence on foreign capital and growing foreign debt. As former Treasury Secretary Lawrence Summers has said, there is something odd about world's greatest power being world's greatest debtor. The U.S. economy, according to doubters, rests on an unsustainable accumulation of foreign debt. Fueled by government profligacy and low private savings rates, current account deficit difference between what U.S. residents spend abroad and what they earn abroad in a year-now stands at almost six percent of GDP; total net foreign liabilities are approaching a quarter of GDP. Sudden unwillingness by investors abroad to con tinue adding to their already large dollar assets, in this scenario, would set off a panic, causing dollar to tank, interest rates to skyrocket, and U.S. economy to descend into crisis, dragging rest of world down with it. Despite persistence and pervasive ness of this doomsday prophecy, U.S. hegemony is in reality solidly grounded: it rests on an economy that is continually extending its lead in innovation and application of new technology, ensuring its continued appeal for foreign central banks and private investors. The dollar's role as global monetary standard is not threatened, and risk to U.S. financial stability posed by large foreign liabilities has been exaggerated. To be sure, economy will at some point have to adjust to a decline in dollar and a rise in

Public Versus Private Savings Rates in LDCs: Please Effects in recent development

Please Effects, first noted in the 1950s, refer to more vigorous tax efforts having an adverse effect on overall savings in LDCs. It is argued here that, by the 1980s, the reforms imposed by conditionality combined with a less forgiving world economy should have led to significant improvements in public savings performances such that Please Effects would no longer be a widely observed phenomenon, and that perhaps even 'reverse' Please Effects might now be observed. Based on a broadly specified cross-country life cycle regression model, and samples ranging from 89 to 93 LDCs, no evidence whatsoever was found for Please Effects in both the 1980s and the 1990s. In fact, our results provided clear evidence for just the opposite, although for tax policy purposes the reverse Please Effects were not found to be especially large. Savings rates would typically rise about 3% for a 10% rise in the tax/GDP ratio. It was concluded that those who would argue for a greater public role in economies that are clearly savings deficient may once again have a case if, as our results indicate, increased taxation to fund social capital accumulation is not at the expense of savings overall.

Neglected Heterogeneity and Dynamics in Cross-Country Savings Regressions

This paper examines the extent to which conclusions of cross-country studies of private savings are robust to allowing for the possible heterogeneity of savings behavior across countries and the inclusion of dynamics. It shows that neglecting heterogeneity and dynamics can lead to misleading inferences about the key determinants of savings behavior. The results indicate that among the many variables considered in the literature only the fiscal variables--the general government surplus as a proportion of GDP and the ratio of government consumption to GDP--are important determinants of private savings rates in the industrial countries in the post-World War II period.

Crowding In or Crowding Out? A Classical-Harrodian Perspective

This paper investigates the effects of budget deficits within a classical-Harrodian framework in a closed economy. In this framework, growth and cycles are endogenous, underutilized capacity is a recurrent phenomenon, capacity utilization fluctuates around the normal level in the long run, and unemployment is persistent. Give the normal rate of profit, the key determinant of growth is the social savings rate. Along the warranted path when growth is balanced and is financed via retained earnings and equity, the social savings rate can be shown to be equal to the flow of business and household savings less the money and government bond holdings of the aggregate private sector-that is, it equals the flow of investable surplus available to firms to finance investment. An increase in the budget deficit always raises short-run output growth, although the stimulus is slowed down by the accumulation of debt by firms. However, with a fixed private savings rate, an increase in the deficit lowers the warranted path. If raising the warranted path is desired, appropriate policies that would raise the social saving rate would have to be implemented. As in Harrod, whether crowding out is harmful depends on the rate of warranted growth relative to the natural growth rate.

Economic Liberalization and Savings Rates

This paper considers the possibility that economic liberalization, by which is meant a reduction in tariffs, quotas, capital controls, and other government distortions of international transactions, may reduce private savings rates. A two stage approach is used to analyze a panel data set covering OECD countries during the past two decades. The conclusion is that there is a significant and robust relationship between economic liberalization and lower rates of savings. One implication is that at least part of the decline in savings rates in some countries over the past two decades may be explained by the liberalization process.

Finance and the sources of growth

This paper evaluates the empirical relation between the level of financial intermediary development and (i) economic growth, (ii) total factor productivity growth, (iii) physical capital accumulation, and (iv) private savings rates. We use (a) a pure cross-country instrumental variable estimator to extract the exogenous component of financial intermediary development, and (b) a new panel technique that controls for biases associated with simultaneity and unobserved country-specific effects. After controlling for these potential biases, we find that (1) financial intermediaries exert a large, positive impact on total factor productivity growth, which feeds through to overall GDP growth and (2) the long-run links between financial intermediary development and both physical capital growth and private savings rates are tenuous.

DOES FINANCIAL MARKET DEVELOPMENT STIMULATE SAVINGS? EVIDENCE FROM EMERGING STOCK MARKETS

This paper examines the empirical relation between financial market development, as measured by the stock market, and gross private savings rates in 16 emerging markets over 1982‐1993. With data from all 16 countries, there is evidence of a significant positive relation between savings and stock market size and liquidity. When countries with outlying values for the stock market measures are excluded, however, all significance disappears. The results suggest that a growing or deepening stock market will not necessarily be associated with higher savings rates. (JEL E21, 016)

The impact of pension schemes on saving in Israel

Israeli micro and macro data indicate that consumption smoothing is limited and thus pension savings increase private and national savings. Since private savings rates are, to a great extent, unequal across different income groups, saving is almost exclusively concentrated in the upper two quintiles.