Table 1 Theoretical determinants of... | Emerald Publishing

Table 1

Theoretical determinants of private saving

Variable	Expected effect	Justification
Income growth	Ambiguous	LCH claims a positive relation as higher income growth increases lifetime earnings and hence private saving. Yet, more complicated and realistic versions of the LCH argue that the effect depends on the age profile of saving. Younger people are expected to save more for retirement while old people are expected to consume more based on their previously accumulated assets
Real interest rate	Ambiguous	Depends on the substitution and income effect of changes in the real interest rate on private saving and which effect dominates the other According to LCH, a change in real interest rate triggers two opposing effects on saving. The substitution effect implies that a higher interest rate increases the current price of consumption relative to the future price, thus affecting saving positively. The other effect, which is called the income effect, indicates that if the household is a net lender, an increase in the interest rate will increase lifetime income and so increase consumption and reduce saving. Therefore, the net effect of changes in real interest rate depends on the relative strength of each of the two effects
Inflation and macroeconomic uncertainty	Positive	LCH claims that financial variables like inflation affect saving decisions. Higher inflation promotes the precautionary saving motive leading to higher private saving. Also, higher inflation could reflect higher profits for corporations and hence higher corporate saving
Financial development	Ambiguous	More financial development reduces the cost of banking transactions and hence promotes private saving. Yet, this depends on the degree of substitution between financial saving and other form of saving. In the presence of unstable or unorganized financial markets, higher development and banking credit could trigger higher informal saving and reduce private saving
Current account deficit	Negative	A higher deficit implies higher foreign saving which could act as a substitute for private domestic saving
Fiscal policy (Public saving)	Negative	Higher public saving crowds out private saving, but the magnitude of the effect depends on whether REH holds or not
Demographic variables (dependency ratio/unemployment)	Negative	A higher dependency ratio or higher unemployment implies more people need support and hence lower private saving

Variable	Expected effect	Justification
Income growth	Ambiguous	LCH claims a positive relation as higher income growth increases lifetime earnings and hence private saving. Yet, more complicated and realistic versions of the LCH argue that the effect depends on the age profile of saving. Younger people are expected to save more for retirement while old people are expected to consume more based on their previously accumulated assets
Real interest rate	Ambiguous	Depends on the substitution and income effect of changes in the real interest rate on private saving and which effect dominates the otherAccording to LCH, a change in real interest rate triggers two opposing effects on saving. The substitution effect implies that a higher interest rate increases the current price of consumption relative to the future price, thus affecting saving positively. The other effect, which is called the income effect, indicates that if the household is a net lender, an increase in the interest rate will increase lifetime income and so increase consumption and reduce saving. Therefore, the net effect of changes in real interest rate depends on the relative strength of each of the two effects
Inflation and macroeconomic uncertainty	Positive	LCH claims that financial variables like inflation affect saving decisions. Higher inflation promotes the precautionary saving motive leading to higher private saving. Also, higher inflation could reflect higher profits for corporations and hence higher corporate saving
Financial development	Ambiguous	More financial development reduces the cost of banking transactions and hence promotes private saving. Yet, this depends on the degree of substitution between financial saving and other form of saving. In the presence of unstable or unorganized financial markets, higher development and banking credit could trigger higher informal saving and reduce private saving
Current account deficit	Negative	A higher deficit implies higher foreign saving which could act as a substitute for private domestic saving
Fiscal policy (Public saving)	Negative	Higher public saving crowds out private saving, but the magnitude of the effect depends on whether REH holds or not
Demographic variables (dependency ratio/unemployment)	Negative	A higher dependency ratio or higher unemployment implies more people need support and hence lower private saving

Source(s): Done by the authors based on Touny (2008) and Grigoli et al. (2018)