Determinants of household savings in South Africa: An econometric approach (1990-2011)

Abstract

This paper examines the determinants of household savings in South Africa over the period 1990-2011. Based on the life cycle hypothesis upon which the study is based as well as empirical literature, particular attention is paid to the effects of age dependency ratio, the level of household income, inflation and real interest rate on household savings. The study employs the Augmented Dickey-Fuller and Phillips Perron unit root tests to test for stationarity in the time series. The Johansen cointegration and the Error Correction Mechanism are employed to identify the long-run and short-run dynamics among the variables. The results of the study reveal that contrary to a theoretical expectation, the level of income and household savings are negatively related, implying that South African households do not only save but increasingly rely on debt to finance their spending. On the other hand age dependency ratio, inflation and real interest rate have positive long run relationships with household savings rate. The study recommends that the government should embark on counter-cyclical fiscal policy to avoid the development of excessive current account deficits during periods of more rapid economic growth, rising investment and falling saving.