Determinants of Consumption and Savings Behavior in Developing Countries |
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| Authors: | Raut Lakshmi K; Virmani Arvind |
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| Institution: | Lakshmi Raut is an assistant professor of economics at the University of California, San Diego. Arvind Virmani is an advisor to the Planning Commission of the government of India. Much of this work was done while the authors were at the World Bank. They gratefully acknowledge conversations with Clive Granger, the comments of three anonymous referees, and the computational assistance of Reza Firuzabadi. |
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| Abstract: | The determinants of savings generally and the specific effectsof government policies on savings and consumption are pivotalforces in investment and economic growth. The Hall hypothesisstates that consumption is a function of lifetime ("permanent")income, rather than income in each period independently. Changesin interest and tax rates, money supply, or government expenditurewill affect permanent income and hence consumption and savingsonly if they are unexpected and thus not already incorporatedin the estimation of permanent income. We are unable to rejectthe Hall hypothesis in tests for developing countries when weallow for varying interest rates. We do find evidence of a negativeeffect of inflation on consumption, and a positive relationshipbetween the real interest rate and consumption. The evidencefor the Hall hypothesis also suggests that Ricardian equivalencemay be valid—this is Barro's hypothesis that the effecton savings is the same whether government deficits are financedthrough taxation or debt. Our preliminary testing, however,does not support Ricardian equivalence. |
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