Financial Development and Aggregate Saving Rates: A Hump-Shaped Relationship
Hong Kong University of Science & Technology (HKUST)
Hong Kong University of Science & Technology (HKUST) - Department of Economics
Hong Kong University of Science and Technology
June 6, 2012
This study has documented a hump-shaped empirical relationship between financial development and the national saving rate across 12 East Asian and 31 OECD economies. An incomplete-market model featuring both heterogeneous households and heterogeneous firms is provided to explain this hump-shaped relationship. The key insight of the model is that financial development tends to reduce the precautionary-saving incentives of households but increase firms ability to borrow and invest. As a result, the aggregate saving rate may rise initially with financial development because of greater investment by fi rms, but then declines with further financial development because of substantially reduced precautionary savings by households. The model also predicts that the market interest rate lies substantially below the rate of return to capital in emerging economies, but the gap diminishes with fi nancial development, as observed in the data.
Number of Pages in PDF File: 46
Keywords: high saving rate puzzle, financial development, hetergenous firms, hetergenous households, borrowing constraints
JEL Classification: E21, E22, E44working papers series
Date posted: July 4, 2012
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