What Drives Private Saving Around the World?

Abstract

Saving rates vary considerably across countries and over time. Policies that spur development are an indirect but effective way to raise private saving rates - which rise with the level and growth rate of real per capita income.

Loayza, Schmidt-Hebbel, and Servén investigate the policy and nonpolicy factors behind saving disparities, using a large panel data set and an encompassing approach including several relevant determinants of private saving. They extend the literature in several dimensions by:

· Using the largest data set on aggregate saving assembled to date.

· Using panel instrumental variable techniques to correct for endogeneity and heterogeneity.

· Performing robustness checks on changes in estimation procedures, data samples, and model specification.

Their main empirical findings:

· Private saving rates show considerable inertia (are highly serially correlated even after controlling for other relevant factors).

· Private saving rates rise with the level and growth rate of real per capita income. So policies that spur development are an indirect but effective way to raise private saving rates.

· Predictions of the life-cycle hypothesis are supported in that dependency ratios generally have a negative effect on private saving rates.

· The precautionary motive for saving is supported by the finding that inflation - conventionally taken as a summary measure of macroeconomic volatility - has a positive impact on private saving, holding other facts constant.

· Fiscal policy is a moderately effective tool for raising national saving.

· The direct effects of financial liberalization are largely detrimental to private saving rates. Greater availability of credit reduces the private saving rate; financial depth and higher real interest rates do not increase saving.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand the determinants of saving in developing countries. The study was funded by the Bank`s Research Support Budget under the research project Saving in the World: Puzzles and Policies (RPO 681-36). The authors may be contacted at [e-mail] or [e-mail].