"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

132 The Life-Cycle Hypothesis
income; if so, the saving-income ratio for given growth would also tend to rise
with income. There have been some tests of this hypothesis based on good-sized
samples of developing countries, beginning from a much debated paper by Leff 1
based on a sample of the countries, to the recent contribution of Ram 2 analyzing
a sample of 121. All of these studies present results which are consistent with the
above hypothesis; for the poor developing countries the saving ratio tends to rise
with income, while for developed countries, there is no significant systematic
income effect. These results can be checked using newly available information
assembled by the International Monetary Fund has assembled information for a
large sample of developing countries (85) which was utilized in an article by
Aghevli et al. [1]. The underlying data have generously been made available
to us in the form of averages of each variable in each country for the years
1982–1988.
The variables available include, besides the ratio of national saving to national
income and income growth, several variables that the authors deemed especially
relevant to underdeveloped countries: per capita real income, inflation measured
by a consumer’s price index, terms of trade, population structure as measured by
the proportion of “active” population, and a 0.1 dummy for whether the country
experiencedd a debt crisis. Unfortunately no information is available on fiscal
variables.
The data were used by the authors to estimate an equation which is reported
on page 59 of the aforementioned publication, and is reproduced on line 1 of table
4.5. The results appear rather disappointing: (i) the coefficient of growth is very
small, less than 1 – 5
as large as for the OECD sample, and it is on the borderline of
significance: (ii) the root mean square error of the estimated regression is some
twice as large as the typical error in table 4.3; (iii) income appears to have a positive
effect on saving though not significant, even at the 10 percent level; (iv) the
effect of inflation is positive but quantitatively negligible and insignificant; (v)
the positive coefficient for the variable “Active” is consistent with a negative
coefficient for the variable “Dep” in table 4.3, since the two variables move in
opposite directions.
However, after the article was published, the identification of an inconsistency
between the IMF and our OECD data led the authors of the IMF article to the
realization that the series they had used for the rate of growth of output was faulty
and should be replaced by a different series that they kindly made available
to us. The complete data set used for the table 4.5 regressions is reproduced in
table 4.6.
Substituting the revised for the erroneous growth series produces a number of
significant changes, including some in the expected direction, as can be seen from
line 2. The standard error of the equation falls sharply and the growth coefficient