INCOME,CONSUMPTION AND SAVING IN URBAN AND RURAL INDIA*

The main purpose of the study is to determine the savings potential of urban and rural households in India and in the process determine the possible savings and consumption functions separately for urban and rural areas. Four different possible functions have been used for determining the savings behaviour of the households both at the aggregate level and at the per capita level. The rural households, according to the results, have an extremely low rate of saving with income elasticity of saving of less than unity. For the urban households on the other hand, the income elasticity of saving is high enough to suggest the possibilities of considerably high savings potential. To understand the consumption behaviour of these households, the long-run and the short-run marginal propensities to consume and the marginal propensities to consume out of‘permanent’ or ‘normal’ income and ‘transitory’ income have been worked out. For the urban sector none of these give encouraging enough results and the analysis has been extended to examine whether other factors like prices and household assets are of any significance. Whereas for the rural sector, Milton Friedman's theory of ‘permanent’ or ‘normal’ income is somewhat substantiated, other factors like ‘transitory’ income, prices and assets appear to inthence urban consumption behaviour though no single one of them substantially enough. A negligible effect of ‘permanent’ income on urban consumption behaviour is, on the other hand, very clearly suggested by the results. Household consumption and savings have next been projected using the above results to determine the possible levels for the next three years. The results suggest that the rate of domestic savings likely to be achieved by the end of the Third Five Year Plan (1965–66) falls short of the targets laid down.     

Demographic links to savings in life cycle models: identification of issues for LDCs

The author considers the potential for a link between the recent pattern of demographic transition and intertemporal and inter-country variations in savings rates. Fertility, infant mortality, life expectancy, and levels of female and child labor force participation are among the various demographic factors which affect national savings rates through their effects upon age structure, age-specific individual savings behavior, and their general equilibrium effects upon interest rates, wage rates, and income distribution. The author establishes a simple discrete time life cycle model of savings, explains the issues related to age structure, and discusses the effect of age-specific savings functions, the general equilibrium effects of demographic factors, the effects of life expectancies and child mortalities, and the nature of social security coverages in less developed countries, as well as issues which are especially important for less developed countries. A new strategy for empirically evaluating demographic policies is proposed. That is, one can estimate the age profile of earnings, saving and fertility rates from household survey data. The life tables can then be used to compute the aggregate savings rate and population size. Any demographic policy which affects the fertility rate, life expectancy, and investment in the quality of children will change the aggregate saving and population growth rates. These two aggregate effects could be compared to evaluate demographic policies. The author stresses, however, that changes in different demographic factors will have different short-run and long-run effects upon the savings rate which will also depend upon whether such changes are transitory or permanent.     

Do remittances and foreign aid augment the gross savings: Bangladesh,India and Philippines perspective?

Savings is considered to be a principal determinant to achieve long-run economic growth. Remittances and foreign aid are two important foreign capital inflows to meet the savings deficiency of developing nations. The objective of this study is to investigate the long-run impact of remittance to stimulate savings in remittance recipient countries. This paper contributes to the macroeconomic impact of remittance through a comparative study on Bangladesh, India and Philippines that positioned among the top ten largest remittance recipient countries from 2008 and onwards. The analysis makes use of an annual time series data over the period of 1980–2015. The Johansen cointegration test suggested long-run cointegrating relationship of remittance and foreign aid on gross savings. The test result suggests positive effect of remittances on gross savings for Bangladesh and Philippines although an insignificant negative effect for India. However, foreign aid has significant negative long-run impact in all the three cases. Government policy should focus on leveraging remittance flows to facilitate savings and investment for capital accumulation.     

Savings and investments in the OECD: a panel cointegration study with a new bootstrap test

In this paper we test for the existence of a stable long-run savings–investments relationship in 18 OECD economies over the period 1970–2007. Although individual modelling provides only very weak support to the hypothesis of a link between savings and investments, this cannot be ruled out as individual time series tests may have low power. We thus construct a new bootstrap test for panel cointegration robust to short- and long-run dependence across units. This test provides evidence of a long-run savings–investments relationship in most of the countries, with USA the most notable exception. However, the elasticities generally smaller than 1 suggest that market imperfections mostly cause only partial home biases.     

Savings, Investment, Productivity and Economic Growth of Australia 1861–1990: Some Explorations

Policy makers' concerns over sub-optimal savings rates in Australia mistakenly concentrate on symptoms rather than causes of low rates of growth in investment and productivity. A growth model of a small open economy is used to demonstrate possible interdependencies of these variables which are tested using cointegration and long-run Granger causality techniques for the periods 1861–1900 and 1949–90. As expected, no direct long-run relationship is found between savings and investment. However the interactions between investment and productivity growth are found to be complex and evolving, whilst savings appear to be determined residually in the growth process.     

Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach

Abstract. A structural vector error correction (SVEC) model is used to investigate several monetary policy issues. While being data-oriented the SVEC framework allows structural modeling of the short-run and long-run properties of the data. The statistical model is estimated with monthly German data for 1975–98 where a structural break is detected in 1984. After splitting the sample, three stable long-run relations are found in each subsample which can be interpreted in terms of a money-demand equation, a policy rule and a relation for real output, respectively. Since the cointegration restrictions imply a particular shape of the long-run covariance matrix this information can be used to distinguish between permanent and transitory innovations in the estimated system. Additional restrictions are introduced to identify a monetary policy shock.     

On permanent effects of transitory phenomena in a simple growth model

It is demonstrated that, because of learning-by-doing in the production process, transitory phenomena, such as market disequilibrium, can permanently affect long-run production techniques and the steady-state path of capital accumulation.     

Aging and Savings in Korea: A Time-Series Approach

Thanks to numerous empirical research studies, a general consensus has been reached on the effects of an aging population on the economy, particularly in terms of economic growth and savings. However, most of the previous research examines the effects of the aging on economically advanced countries. Furthermore, rarely have those studies used the time-series properties of the data. By applying two popular time-series statistical tools (multivariate cointegration analysis and vector error correction model) to Korean data, this paper finds: (1) There is a long-run equilibrium linkage among the aging, medical expenditure and savings; however (2) there is no Granger-causality present between aging and national savings in the short run in Korea.     

Saving,investment and capital mobility in EU member countries: a panel data analysis of the Feldstein–Horioka puzzle

ABSTRACT

In this paper, we reexamine the long-standing and puzzling correlation between national saving and investment in 14 European Union (EU) countries. We employ a panel data set for the period 1970–2015 and we apply recently developed maximum likelihood panel cointegration methodologies. We find that there exists a long-run relationship between savings and investment for this panel of EU member countries, with the savings retention coefficient being low in magnitude but statistically different than zero. Therefore, we argue that there is weak evidence in favour of the Feldstein–Horioka puzzle and that the long-run international solvency condition is maintained in most of these countries. This evidence implies a moderate degree of capital mobility which is consistent with the macroeconomic experience of these countries during the period under investigation.     

Firm-specific cost savings and market power

Summary. We report a policy experiment that illustrates a potential problem of using historical pass-through rates as a means of predicting the competitive consequences of projected firm-specific cost savings in antitrust contexts, particularly in merger analysis. The effects of cost savings on welfare can vary vastly, depending on how the savings affect the industry supply schedule. In a capacity-constrained price-setting oligopoly, we observe that cost savings can overwhelm behaviorally salient market power incentives when the savings affect marginal (high cost) units. However, cost savings of the same magnitude on an infra-marginal unit leave market power unchanged.     

Cointegration and spatial price transmission among wheat and wheat-flour markets in Afghanistan

This article examines cointegration and spatial price transmission among Afghan wheat and flour markets as well as their linkages with those of supplier countries and global markets. Unit root tests, consistent momentum threshold autoregressive (M-TAR) models and vector error correction models (asymmetric and symmetric) are employed to achieve research objectives. The results suggest that provincial wheat and flour markets may have a long-run relationship with principal market of Kabul. Afghan wheat and flour markets may also be cointegrated with their respective global, Kazakh and Pakistani markets. While provincial wheat markets might adjust to divergence from their long-run equilibrium with Kabul wheat market, some of the provincial flour markets may not respond to deviation from their long-run equilibrium with Kabul flour market. The speed of adjustment towards the long-run Afghan–Pakistani and Afghan–Kazakh equilibrium may be faster for Afghan flour than wheat markets. The equilibrium adjustment coefficients are generally small and market imperfections may exist, however. A shock in Kabul wheat and flour markets may have long-lasting effect on the respective provincial markets whereas a shock in global wheat and Pakistani, and Kazakh wheat and flour markets might have transitory effect on the corresponding Afghan markets.     

Assessing the stochastic stability of public debt: the case of Austria

This paper characterizes the long-run distribution of Austrian public debt using a Markov chain model of the debt-GDP ratio and several key macroeconomic variables. We apply Bayesian techniques to estimate the transition probabilities of the model which allows to incorporate information from other countries. Based on the model, we argue that the historical record of Austrian fiscal policy is consistent with a stable long-run distribution of the debt-GDP ratio with an expected value close to the 60% threshold of the Maastricht treaty. Our results suggests that the strong increase in the debt-GDP ratio in the aftermath of the recent financial crisis should be seen as a transitory tail event rather than as a sign of long-run unsustainability. However, we also show that the existence of a stable long-run distribution depends on a continuing tendency of fiscal policy to “lean against debt” by reducing the primary deficit in face of rising debt. Finally we assess how exogenous shocks to the primary deficit and real GDP growth affect the model-implied distribution.     

Corruption and the Political Economy of Resource-Based Development: A Comparison of Asia and Sub-Saharan Africa

We model how the “supply and demand” for bribes affects resource use by an economy, and the reinvestment of resource rents in other assets. This requires adjusting the World Bank’s measure adjusted net savings for any rent dissipation due to corruption. The impacts of corruption on long-run changes and periodic growth in the adjusted net savings rate are estimated across African and Asian economies from 1970 to 2003. Corruption rather than resource dependency per se affects negatively the ability of African countries to reinvest resource rents in the short term, but for Asian countries, corruption is less important than point resources. Corruption influences long-run growth in adjusted net savings rates in all countries, and is also the “pathway” through which this growth is affected by patterns of resource use, trade and abundance.     

Optimal unemployment insurance: transitional dynamics vs. steady state

In this study, we ask whether the presence of precautionary savings substantially reduces the optimal replacement rate in an European economy type characterized by high unemployment benefits and moral hazard. We build a simple job search model calibrated on French data and, in line with previous studies, find that the optimality criterion based on comparisons of steady states leads to a low optimal ratio. Yet, this result ignores potential transitional costs due to the necessity for agents to increase their savings and reduce their consumption whenever the ratio is cut. We therefore build a dynamic model taking full account of the transition, and show that a reduction in benefits reduces welfare. Even though the long-run optimal replacement rate is lower than the current one, transitional costs dominate long-run gains.     

Another Piece in the Feldstein — Horioka Puzzle

Using UK quarterly data, we re-examine the nature and degree of the relationshipbetween savings and investment by means of a newly developed bounds testingprocedure to cointegration within an autoregressive distributed lag (ARDL)framework. Our finding of cointegration in all samples considered is consistent withthe view that the long-run relationship between savings and investment is notexclusively dependent upon the level of financial integration. The evidence alsoindicates that this relationship weakens after the abolition of UK controls oncapital flows in 1979, suggesting that the Feldstein-Horioka framework providesat least a partial measure of the degree of capital mobility.     

Examining the stochastic behavior of REIT returns: Evidence from the regime switching approach

In this paper the stochastic behavior of the returns on real estate investment trusts (REITs) is examined by using the unobserved component Markov switching (UC-MS) model. This approach endogenously permits the volatility to switch as the date and regime change and allows us to decompose the permanent and transitory components in REIT returns at monthly frequencies. The empirical evidence clearly shows that, for all of the REIT returns, the overall variance of the transitory component is significantly smaller than the corresponding variance for the permanent component. The durations of the high-variance regimes for both the fundamental and transitory components are short-lived and revert to normal levels quickly.     

Cointegration and common trends on the West German labour market

In this paper we analyze the West German labour market by means of a cointegrated structural VAR model. We find sensible stable long-run relationships that are interpreted as a labour demand, a wage setting and a goods market equilibrium. In order to study the dynamic behaviour of the model we identify two common trends that push unemployment. We find that goods market shocks have only transitory impacts on unemployment. In the long run, it is almost equally determined by technology and labour supply factors. However, transitory shocks have major importance in the shorter run since adjustment processes are rather sluggish. First version received: Sept. 1998/Final version accepted: Feb. 2000     

Reinvestigating the Nature of Persistence of Shocks in the Macroeconomic Variables Relating to the Indian Economy with Special Reference to Structural Changes and Seasonality

Over the last two decades, there is a substantial debate on the persistence of shocks, in terms of their transitory and permanent nature, caused to the macroeconomic aggregates. Macroeconomic variables with transitory shocks will revert back to the long-run deterministic path eventually, whereas variables with permanent shocks will move according to random walk having no fixed predetermined path. These two series known as Trend Stationary (TS) and Difference Stationary (DS), respectively, have their significance in the specification of the regression equation and testing competing economic theories. Consequently there are a good amount of studies to classify the macroeconomic aggregates as TS vs. DS. In this context, relatively new developments of seasonal integration and presence of structural breaks in the macro variables has aroused a need to reinvestigate these hypotheses afresh. This paper makes an attempt to examine some of these issues by making use of the Indian data.

     

Sources of Real Exchange Rate Fluctuations in the Nordic Countries

In an attempt to move beyond the purchasing power parity hypothesis, this paper addresses two issues. The first concerns the causes of movements in real exchange rates. In contrast to the typical result, supply shocks are found to dominate the long-run variance decompositions for each of the four Nordic countries under study. This suggests that productivity developments are the most important determinant of long-run movements in real exchange rates. A second topic is the relative importance of stationary and non-stationary components of real exchange rates. Also in contrast to previous findings, transitory shocks are more important than permanent shocks for three of the four countries.     

A revalidation of the savings–growth nexus in Pakistan

The aim of this study is to understand the relationship between savings and economic growth in Pakistan over the period 1971–2011. The cointegration and the Granger causality tests are adopted to examine the relationship between the variables. The results confirm the existence of long-run equilibrium among the variables of interest. Meanwhile, savings have positively affected economic growth in both the short run and long run. The Granger results also show that savings Granger-cause economic growth. Based upon these findings, we confirm that savings is a catalyst of growth for the Pakistani economy. Additionally, our results seem more likely to support the capital fundamentalists because the long run estimation as well as the Granger causality results also indicates that savings growth can effectively spur economic growth in Pakistan.