DIFFERENCES IN HOUSEHOLD SAVINGS BEHAVIOR: EVIDENCE FROM INDUSTRIAL AND DEVELOPING COUNTRIES

NDERSTANDING the nature of household savings behavior is critical in design- ing policies to promote savings and investment. Given the differences in the economic environment of the developing and industrial countries there should be substantial variation in the household behavior. Most of the empirical literature that analyzed cross-country savings behavior concentrated on aggregate savings due to the lack of consistent information on household behavior and pos- sible differences in the household savings in developing versus industrial countries were disregarded. This study aims at examining the differences in household sav- ings behavior in developing and industrial countries from a cross-country perspec- tive. Household savings literature is based on two major hypotheses. Following the pioneering work of Keynes (21) which defines savings as a linear function of in- come, the first major breakthrough in savings literature is the permanent income hypothesis of Friedman (11). This hypothesis differentiates permanent and transi- tory components of income as determinants of savings. Permanent income is de- fined in terms of the longtime income expectation over a planning period and a steady rate of consumption maintained over lifetime given the present level of wealth. Transitory income is the difference between actual and permanent income and since individuals are assumed not to consume out of this income category, marginal propensity to save on transitory income will be unity. Empirical tests of the permanent income hypothesis are mainly concerned with the effect of initial wealth on savings as well as the marginal propensities to save out of permanent and transitory components of income. However, the results of empirical studies on per- manent income hypothesis are divergent for both developing and industrial coun- tries (20) (13) (14) (15). U