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

Recent Declines in the Savings Rate 137
ficient estimates are substantially the same though the role of income is somewhat
downgraded, in both magnitude and significance.
As a further test of the approximate independence of saving ratio from income
above some low level, we have estimated separate equations for countries below
and above a cut-off represented by mean per capita income (1,650 dollars). The
results, given in lines 5a and 5b confirm that income is unimportant above the
cut-off. Indeed, the point estimate of the coefficient of the reciprocal becomes
positive, which would imply that the saving ratio declines with income, except
that it is insignificant. On the other hand, for countries below the mean, the effect
is positive, and quantitatively important. For instance, the coefficient implies that
for a poor country such as Ethiopia with per capita income of 130 dollars, the
saving ratio might be eight percentage points below what it would be with an
average income.
Lines 6a and 6b report the results of one more test suggested by the observation
that the sample contains a surprisingly large number of countries that report
a decline in income, namely 42, or just about half. Now the implications of the
life cycle are supposed to hold in steady state. Negative growth is unlikely to represent
a steady state but more likely to reflect transitory development. This should
weaken the association between growth and saving ratio for countries with declining
income. To carry out the test we have broken up the sample into two corresponding
subsamples, one consisting of the growing countries (6a) and the other
of the declining ones (6b). As expected, for the growing countries the coefficient
of income growth is larger, highly significant, and of the same magnitude as for
the OECD sample. For the declining countries the significance of the coefficient
is borderline and the whole fit is poorer than in line 6a.
In conclusion, it would appear that the LCH proposition that the saving ratio
does not depend on per capita income is supported, but only above some threshold
that included all the OECD countries in our sample. However for poorer countries
the saving ratio may be expected to respond significantly to per capita
income.
But note that in the generalized LCH, the effect of income on saving, even for
poor countries, is not a direct one as in the Keynesian formulation; rather, per
capita resources affect the wealth income ratio which, multiplied by the saving
rate of growth determines the saving ratio; in particular; it is still true that with
zero growth there should be no saving, no matter what the rate of growth.
3.2 Interest Rate and Inflation
There are two further variables that we have barely mentioned in reviewing the
LCH, namely the (real) interest rate and inflation, that are frequently regarded as
playing a major role in saving decisions though, paradoxically, there is a lot of