DETERMINANTS OF SAVINGS INTENSION A. Income Both the Keynesian savings function  and the permanent income hypothesis  Indicate a positive effect of income on savings. Using time series data for forty-nine countries, Rossi, for example, indicated the positive impact of current income levels on savings rate without differentiating types of income .
According to the permanent income hypothesis , which distinguishes between permanent and transitory components of income, households will spend mainly the permanent income and therefore the transitory income will immediately be channeled to savings with marginal propensity of savings from this income approaching unity. (Differences in household savings behavior: Evidence from industrial and Developing countries Gulnur muradoglu Fatma taskin) B. Wealth Different definitions of wealth are used in the literature depending upon the different Assumptions regarding the formation of expectations about consumption .
Still, wealth is expected to have a negative effect on savings through the reduction of savings out of permanent income . As in the case of the Schmidt-Hebbel, Webb, and Corsetti study , this study also adopted the view that monetary asset holdings can be used to measure wealth both because monetary assets lessen the dependence on current income, especially when it declines temporarily, and the data for monetary assets are available on a comparable basis for all countries in the sample. (Differences in household savings behavior:
Evidence from industrial and Developing countries Gulnur muradoglu Fatma taskin) In most industrial countries, revaluations of equities and housing have contributed to a substantial increase in the value of household net worth through most of the 1980s and 1990s, reducing the need for saving out of personal income. Empirical studies generally support the view that wealth is an important variable in explaining long-run movements in personal saving (Bovenberg and Evans 1989; Bosworth, Burtless, and Sabelhaus 1991).
Therefore, our set of explanatory variables includes the ratio of personal net worth to disposable income. We do not include a measure of human wealth. As with public pension wealth, estimates of human wealth are highly dependent on the assumptions regarding expectations of future income. In the equations using the NIEA measure of the personal savings rate, the coefficient on the wealth ratio will also be influenced by the fact that the increase in the value of pension (e. g. employer-sponsored pension plans) and mutual fund holdings—which is reflected in the NBSA estimate of personal net worth but not in the NIEA measure of personal income—has probably substituted for saving out of personal income. (Long-Term Determinants of the Personal Savings Rate: Literature Review and Some Empirical Results for Canada By Gilles Berube and Denise Cote) C. Rates of Return The effect of interest rates on savings was inconclusive in the previous empirical Studies.
According to intertemporal consumption decision, an increase in the rates of return increases savings but real income effect of higher rates of return can affect savings adversely. In his survey article, Balassa argued that the effect of real interest Rates on savings are positive for developing countries . Studying a group of Industrial countries Koskela and Viren also observed that savings increase as real Rates of interest increase . (Differences in household savings behavior: Evidence from industrial and Developing countries Gulnur muradoglu Fatma taskin)
The net result of a change in the rate of return, in the current period, is theoretically ambiguous because of potentially offsetting substitution, income, and revaluation effects. An increase in the rate of interest tends to encourage individuals to postpone consumption and increase savings in the present period in order to achieve higher consumption levels later. That is, the intertemporal substitution effect of a change in the rate of interest on savings is positive The direction of the income effect depends on whether the individual is a net lender or borrower.
A net lender receives more in investment income than he has to pay to service his debt. In that case, higher interest rates increase net investment income, thus encouraging present consumption and lessening the need to save in order to finance future consumption. If present consumption and future consumption are normal goods, it is possible for a higher interest rate to cause present consumption to rise, while the smaller amount of savings will nevertheless grow to a larger amount of future consumption. Hence,