Determinants of Household Savings
Submitted to :
Dr.M.Aslam Chauhdary M.B.Econ (4th Semester)
DEPARTMENT OF ECONOMICS UNIVERSITY OF THE PUNJAB
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.
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.
“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 4
. 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
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.
“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.
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.
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
Y = Saving
X2 = Inflation
X3 = Interest rate
And α, β1, β2, β3 are regression coefficients.
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
Variables Constant GDP Inflation Interest rate
Coefficients -252.09687 8.763098 -16.29155 -50.42768
Std.Error 163.9985 0.641272 9.065754 11.38956
t-statistics -1.542506 13.66519 -1.797043 -4.427535
probability 0.1425 0.0000 0.0912 0.0004
R-square Adjusted R square S.E of regression Sum of squared resid Log like lihood Durbin Watson stat
0.939387 0.928022 111.6562 199473.9 -120.4558 2.19123
Mean dependent var. S.D Dependent var. A Kaike info criterion Schwarz criterion F-statistics Prob.(F-statistics)
463.6418 416.1811 12.64473 82.65621
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.
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.
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.XXVIINo.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