Research Project

Determinants of
Household Savings

Submitted to :
Dr.M.Aslam Chauhdary

M.B.Econ (4th Semester)

DEPARTMENT OF ECONOMICS
UNIVERSITY OF THE PUNJAB

INTRODUCTION
Current income minus spending on current needs is called saving.

That part of disposable income not spent on current consumption; disposable income less

consumption is saving.

Household saving is defined as household disposable income less

consumption. Household income consists primarily of the compensation of employees,

self-employment income, and transfers.

Economist have identified three broad reasons for saving. First, people save to meet long

–term objectives, such as comfortable retirement. By saving some part of their income

during working years, they live better after retirement than if they do not save and depend

on their pension. The other objectives may include college tuition for one’s children and

purchase of home or car. These needs occur at different stages in one’s life, economist

call this type of saving life-cycle saving.

A second reason to save is to protect oneself against unexpected stages;

the loss of a job or a health problem. Saving for protection against emergencies is called

precautionary saving.
A third reason to save is to save money foe one’s children as

inheritance. Saving for the purpose of leaving inheritance is called bequest saving.

Bequest saving is an important part of overall saving.

People do not mentally separate their saving into these categories,

these reasons motivate the savers to save.

The saving rate Pakistan is not as much high as it should be in case of developing

agriculture economy.

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There is a statistical overview of household saving in Pakistan.

The statistic compiled by the household integrated economic survey reported that 54.7

% of household in Pakistan earn up to Rs. 2500 monthly 31.9% earn between Rs.2501 to

Rs. 5000 monthly and 13.4% earn more than Rs.5000.It means majority of the rural

population fall in the income group category earning from 1000 to 2500.

Methodology

Simple OLS regression model is used to test this hypothesis. . To provide the complete
picture of the impact of income, interest rate and inflation on saving the model is
estimated.

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 Literature review
“Aasim M. Hussain” (1995)

There are several factors that affect an economy’s long run rate of saving. The principal

factors that influence the saving is demographical structure of the population. When

working members of an economy is increased, then ratio of savers to dissevers also

increased in an economy as a result the average propensity to save is also increased.

Income growth can also be a determinant of the saving rate. Due to increase in the rate of

growth the saving rate is also increased.

The oter factors include interest rates; wealth and public sector debt are also important

determinant of the rate of saving in economical models.The drawback in this study is that

this study use the outdated data.

“Zia M. Qureshi” (1981)

Income has been considered as the chief determinant of saving. The exact nature of

relationship between the saving and income is controversial. The study indicates that

large and rapid increases in household income have a positive impact on the rate of

saving. The rate of growth of income is a major determinant of saving. The important

finding of the paper is a strong positive correlation between the real rate of interest and a

household saving. But this finding contradicts the other studies. The empirical studies of

the saving-interest rate relationship have produced a variety of results. Some findings

show significantly positive coefficients on the rate of interest to significantly negative

ones. But majority of the studies report a positive correlation between saving and changes

in interest rates. The other important determinant of saving was founding to be inflation

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. Inflation was found to have been strongly and negatively related to household saving.

The drawback in this study is that this study says that OLS yield biased and inconsistent

results.

“Ashfaque H. Khan” (1988)

Interest rate is an important determinant of saving. It is found that there is a significant

positive association between the real rate of return on deposits and aggregate savings.

. The aggregate real income is also found to be a key determinant

of savings. Financial development is also found to have significant positive influence on

saving. It is also found that inflation have significant impact on

saving The drawback in this study is that, they use three different expectation schemes,

while out of these schemes the two schemes ; static expectation and adaptive expectation

model did not perform well.

“Ashfaque H Khan and Zafar Mueen Nasir” (1993-1994)

Khan and Nasir analyze that dependency ratio is found to produce a negative influence on

house hold savings. Education also has a negative influence on household savings.

Because more educated households have more consumption expenditures that’s why they

can’t save more. Saving is also increases with the age but decline when age cross a

certain limit. Burney and Khan examine the impact of household income along with other

socioeconomic and demographic factors such as dependency ratio, education, earning

status, employment status and occupation.

“M Shaukat Ali” (1985)

It is found that a strong negative correlation exists between inflation and house hold

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savings. “It means that increased cost of any commodity reduced the saving.

It is found that a 10 percent increase in overall price level reduces saving by 5 percent.

Moreover if there is an increase in income then there is also increase in household

savings.

“Naheed Z.Khan and Eric Rahim” (1993)

This study provides some evidence on the relationship between foreign aid, domestic

savings and economic growth for Pakistan. Foreign aid played an important role in

determining the behavior of savings in Pakistan. This study shows negative coefficients

of correlation between foreign aid and savings. The drawback in this study is that the

estimated coefficients did not give information about negative relation between these two

variables.

“Naeem A. Burney and Ashfaque H.Khan” (1992)

On the basis of evidence Leff 1969 obtained an inverse relationship between the

dependency ratio and household savings. The dependency ratio has been defined as

population aged 14 and below plus a percentage of the population aged 65 and above.

But several studies contradict this finding. The difference in the several studies is due to

the way by which the dependency ratio is defined. In defining dependency ratio the age

is considered but if instead of age the earning status is taken then it become more

meaningful. Because in rural areas the children also play an important role in earning

activities. Kelley 1980 and Akhtar 1987 have examined the impact of level of education

on household savings and their findings are ambiguous. Because on one hand educated

household have higher consumption expenditures while on the other hand educated

people are likely to earn more.

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“Prema Chandra Athuhorala and Kunal Sen” (2001)

This study examines the determinants of private saving in the process of economic

development in India. It is found that saving rate is increased with the rate of growth of

disposable income. The real interest rate on bank deposits has a positive impact on rate of

savings. This study found that rate of inflation have a significant positive influence on

domestic savings. This result relate to the fact that India is a low inflation country.

CONCLUSION
By reviewing the above studies I concluded the results:

There are various determinants of household savings. The most important of which is

income and it has positive effect on savings.

The other important determinant is inflation, which has negative effect on savings.

Interest rate is also one of the determinants of savings. There is some controversy about

it. According to some studies it has positive effect but some says that it has negative

effect on savings.

The dependency ratio and various categories of education have also negative effect on
Savings.

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MODEL AND EMPIRICAL ANALYSIS

The result in this study has been obtained by using ordinary least square (OLS)

technique. The regression model is developed The model is developed to examine the

impact of GDP ,interest rate and inflation on saving.

The specification of regression model is given as follows.

Y = α+β1X1+ β2 X2+ β3 X3

where

Y = Saving Xl =GDP X2 = Inflation X3 = Interest rate

And α, β1, β2, β3 are regression coefficients.

EMPIRICAL ANALYSIS:
The statistical analysis of household saving in Pakistan is as follows.

Saving = -252.9687+8.7630(GDP)-16.2915(inflation)-50.4276(interest rate)

Dependent variable : Savings

Method: Least square
Sample: 1984-2004
Included observation: 20

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Variables Coefficients Std.Error t-statistics probability

Constant -252.09687 163.9985 -1.542506 0.1425

GDP 8.763098 0.641272 13.66519 0.0000

Inflation -16.29155 9.065754 -1.797043 0.0912

Interest rate -50.42768 11.38956 -4.427535 0.0004

R-square 0.939387 Mean dependent 463.6418

var.
Adjusted R square 0.928022 S.D Dependent var. 416.1811
S.E of regression 111.6562 A Kaike info 12.64473
criterion
Sum of squared 199473.9 Schwarz criterion 82.65621
resid
Log like lihood -120.4558 F-statistics
Durbin Watson stat 2.19123 Prob.(F-statistics) 0.000

The estimates coefficient of GDP is 8.7630 which shows that one unit increase in GDP

will cause 8.7630 unit increase in savings .The coefficient of inflation is -16.29155 shows

And the coefficient of interest rate is -50.42768 shows that one unit increase in interest

rate will cause -50.42768 unit decrease in savings. . R2 is 0.93% which shows 93% of

total variation in dependent variable (savings) is explained by the regression model. This

implies that 75 of variation remains unexplained. The value of Durbin Watson shows the

absence of auto correlation.

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CONCLUSION
After going through the whole study research reached the following conclusion.. There is

direct relation between household saving and income, it means by increasing income the

household saving also increases. Secondly, there is inverse relation between interest rate

and household savings, it means by increasing interest rate the household saving reduced.

Thirdly, there is also inverse relation between household saving and inflation, it means if

inflation rate increased then household saving decreased.

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 REFERENCES

1- Robert H.Franf,Bens Bernanke,Principles of Economics, Mc Graw –Hill Irwin

2- Ashfaque H.Khan and Zafar Mueen Nasir (1998), Stylysed facts of household
savings,The Pakistan Development Review,37:4 part II

3- Aasim M.Husain (1995),Long-run determinants of private saving Behaviour in

Pakistan,The Pakistan Development Review,34.4 part III

4- Zia M.Qureshi(1981), Household saving in Pakistan,The Pakistan Development

Review,vol XX,No.4

5- Ashfaque H.Khan (1988), Financial Repression,Financial Development and

structure of savings in Pakistan,The Pakistan Development Review.vol.XXVII-
No.4 part II

6- Naheed Z.Khan and Eric Rahim(1993) Foreign Aid,Domestic savings and

Economic Growth,The Pakistan Development Review32:4 part II

7- Nadeem A. Burney and Ashfaque H.khan (1992) Socio Economic characterstics

and household savings,The Pakistan Development Review,31:1

8- Prema-Chandra A thukorala,Resarch school of pacific and Asian studies,The

Australian National University, Kunal Sen,School of Development
studies,University of East Anglia

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