Explaining differences in the domestic savings ratio across countries: A panel data study

This article seeks to analyse the major determinants of differences in the domestic savings ratio between countries using panel data for 62 countries over the period 1967-95, A basic distinction is made between the determinan ts of the capacity to save and the willingness to save. The capacity to sav e depends primarily on the Level of per capita income (but non-linearly) an d the growth of income (the life-cycle hypothesis), and the empirics strong ly support these hypotheses. The willingness to save is assumed to depend o n financial variables such as the rate of interest, the level of financial deepening and inflation. We find no support for a positive interest rate ef fect, but strong support for the level of financial deepening measured by t he ratio of quasi-liquid liabilities to GDP. Inflation exerts a mild positi ve effect on saving but soon turns negative. Total saving may also depend o n tax effort but a surprisingly strong negative relation is found between t he ratio of tax revenue to GDP and the domestic savings ratio.