This paper extends our empirical knowledge of the determinants of private saving for a large sample of industrial and developing countries, Both time series and cross-section information is used, as the explanatory power of potential variables differs widely in those two dimensions.
Several conclusions emerge clearly from the regressions, despite some heterogeneity in the results. First, there seems to be a substantial offset, averaging 60 percent, of changes in the government fiscal position from private saving. This offset, although large, is considerably below unity, implying that changes in the government’s fiscal position can have a significant impact on national saving. Moreover, the offset depends on whether those changes are due to government spending or tax changes.
Demographic effects are also an important determinant of private saving rates. This conclusion suggests that the projected aging of the population in most industrial countries will generate significant downward pressure on private saving rates over the next three decades. However, developing countries show an opposite trend in the overall dependency ratio, as an increase in those over the age of 65 will be offset by a decline in the proportion of those under the age of 20. Therefore, the net effect on world saving could be a small positive figure.
Other variables also influence saving, in particular income growth, which operates through several channels. A direct positive association between GDP growth and private saving emerges from most of the specifications, while increases in the level of per capita income (relative to the United States) tend to influence saving positively in low- to middle-income developing countries. Finally, a composition effect of changes in the relative sizes of the countries concerned can also affect the aggregate rate of saving. If countries with high saving rates continued to grow faster, their increasing share of world output could induce an upward trend in world saving of several percentage points.
The paper finds that the real interest rate has a positive, and significant, coefficient for industrial countries and for the combined panel of data; however, the results are not very robust, owing to data problems and shifts in the relationship due to financial liberalization. It was found that changes in the terms of trade have a significantly positive effect on saving for industrial countries, for which a longer sample (including the two major oil price shocks) was available, and that, for developing countries, higher foreign saving (a current account deficit) tends to depress private saving.