Monday, September 17, 2007

The Interest Elasticity of Savings in Developing Countries: The Existing Evidence

The Interest Elasticity of Savings in Developing Countries: The Existing Evidence by Alberto Giovannini, Massachusetts Institute of Technology, 1983.

Fry and Mason in a variety of studies from the 70s covering data mostly from the 60s shows:
He finds that an increase in the real rate of interest 1% would raise the ratio of domestic savings to income by 1.6 to 2.1 tenths of 1%, asymptotically from 1.8 to 2.2 tenths of 1%.

3. Concluding Remarks
Serious doubts are cast on the view that interest elasticity of savings is significantly positive and easy to detect in developing countries.
...
We discuss what we think are the most serious drawbacks in the list below.
1. The first problem, and certainly the hardest to solve, is the quality and homogeneity of the data.
2. The savings variable used in the regressions is aggregate domestic savings: households and corporate savings plus the government budget surplus. [Yes treating the different sectors as homogeneous is a problem when trying to look at savings from the general households]
3. Absence of any tax considerations. ...cases like Singapore, the marginal capital income tax rate has varied significantly in the 1970s.
4. The exclusion of relevant variable from the regressions reported is suggested by the magnitude of the lagged dependent variable.



Notes:
Life Cycle Theory?

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