I Fiance Apicultural

101
I1e positivc respolse of supply of deposits to tie intel cst rate follows
directly firoi standard economics and fror the ti icory oflport folio balance.
The impact of the rise in the real interest rate on overall savings (physical
plus financial) cannot be detcriiincd ])(callsc of thc amlibiguous nature
of its income effect, although the substitution effi-ct is positive (see B. M.
Desai 1983b; Miksell and Zinser 1973; and Smdcr 197-1).
Response of Rural Deposits
to the Interest Rate
As mentioned ealicr, some dcscriptlye stulics (Adaiis 1978; Ahn,
ams,and Ro 1979; Lev and Kim 1976; NMoor 197,1) conlend that lhe
response of rural deposits to the interest late is highly 'lastic, though
they (10 [ot plovid the eiipirical value of this clasticit'v (lablc 18).
Other descriptive sludics trg- that this rcsponsc is intlerest-inclastic
(see, for example, Akomlpong 1976). 1lowl-ver, six out of the eight
ecomonietric stulics peiseited ilI Table 18 show that wle the meal
intereslate incrcases by I percle II;lge poiIIt, Ihc suIpply of rtra (lclposits
inclases byI nli'h less thal I piveeilt. This is lhe (ase for countries as
diversc ai the 1 nited States, India, Kenya, tlw Republic (,fKowra, and
laiwait:i Six studies (Paulsonl 1981; (upt l170a; [cc ;und Kim 1976;
"laa 1973; 1lamndegcr 1968; and Pcnson 1972) ()n these fivc c(oilvis
!;)ow that lw ilitiest clasticity ofdcposits is lowest ill.ll( Is (0.002-0.02),
followtd byL .ICs (0.16;), and thcn IlICs (0.33-0.87). htis notworthv lat
this estimlate for l.lCs, milikc Ihose folr MICs and I llCs,"' is for all
households, both filI and nlifaliI lence, judging the potential of
intecest rate policy to ilduct.Ec uIII households to save in the fo1rm of
financial deposits should be undei taken with great caution. This holds
ex'em fo.r thw two ecoionelltric .tidies by Srinivasau andl Mcycr (1986;
n.(.) showing that the iCSl)osc of rural deposits ilobilize(l by the
coimmercial banks to the interest late is highly elastic in four or five
South Asian countries takcn together (India, Nepal, lakistan, Sri Lanka,
anud additionally langla(lesh) (Table ,18).
The two South Asiaii stlies have some othrc st:\cie limitations.
First, they cnsi(Icr the r iliterest latew oi 12-monil iitc (c)osits, CveCn
though the (h.pendent variable is savings, tilim, and demiiand deposits.
Second, tIly'(o [ot estimate the resl)oilse if financial deposits to the
interest rate for each iIIdividtal o lty. Ilstead, they pull together data
for four or five comiltric-s i which the comncrcial bamking and eco-
Itoinic (inclhdinig the. tertiary or sCvice sector) 5siricilc ill rral areas is
v'ei' (liver-se anid at diffCA(ieit level.s of IveloFicut. Th;1(t, ititIicr of
3
"[thRel)ttltc of Ko ;i and 'ai\s iage often cited as sttcessfil examples of tie strong
ititcetllit IIIpr ided ) Io t spp ofdeposits l
Ib high iIIIcts rates onII deposits, bttt Ithis
Contetiljolt des not hold wheu examitted 5itpiricalty.
"'Evtn for 1llCs, the elasticity estimate for farn households is mitch lowet thtai ttat for
allhouselolds, the fotincr being 0.13-0..t2, while itie lattcr is 0.66-0.87. Nonetheless, the
igttltetst clasticity of fartldeposits illI ltCs is mto than twice t( \atil( fo' tICs.