Relationship Between Savings and Inflation

Relationship Between Savings and InflationSavings help cushion the business cycle as the miserliness faces sound economic situations (Syden, 2014). To have a sustainable economic growth, there is a need for sustainable resources to support it. That is why salvages are need to finance capital spending. These high savings score levels have allowed the miserliness to gain high levels of investment (Horioka Terada-Hagiwara, 2011). Chinas domestic savings rate is one of the highest in the world (Loayza, Schmidt-Hebbel, Serven, 2000). Inadequate savings would leave the economy vulnerable to shocks in income uncertainty and unexpected rise in prices.At 52% of the national GDP, Chinas domestic savings rate is among the highest in emerging markets inadequate savings leave households vulnerable to shocks in income and uprise prices, resume inwardness to government in providing retirement assistance, constrain individuals in accumulating wealth inadequate savings leave households vu lnerable to shocks in income and rising prices, add burden to government in providing retirement assistance, constrain individuals in accumulating wealth.Many factors come into play with regard to how much to spend and how much to keep for future spending. round off LITERATUREThere have been a lot of theoretical and empricical research studies about the relationship of savings on different factors bid inflation rate, unemployment rate, and absorb rate.It has been argued that savings are important, and when the economy is hit hard, having money in the bank can ease the problem (Elmerraji, 2010). Saving rates around the world differs widely. (Loayza, Schmidt-Hebbel, Serven, 2000) state that China, worlds fastest growing economy, had one of the largest national saving rates in the world. Those at Sub-Saharan Africa save less than 15% of their vulgar national disposable income epoch East Asia saves more than 30%. In recent years, saving rates have doubled in East Asia while those in Latin America were stagnated.What people do not spend after consuming part of their income is called personal savings. People tend to put their savings on bank accounts or partly invested (Piana, 2003). Given a certain income, the decision of consuming a good negatively affects savings. Postponing such consumption would increase savings and in contrast, savings can rise due to negative expectations for future income.As economic shocks occur on business cycles, households experience hard time in unexpected reduction in income. According to the Life-cycle hypothesis by Milton Freidman, people would eventually save more and minimize consumption to repeal future uncertainty.(Zaman, Carannate, Ferra, 2013) In times of economic crisis like the recent financial crisis on 2008, policy measures and uncertainty affects household consumption and saving decisions. In the Spanish economy, after the great recession, there has been an evolution of saving rates (Bande Riveiro, 2012). The be havior of households has changed after the great recession, through increasing saving rates. Large increase in savings rates is connected to the increased uncertainty in the future (Bande Riveiro, 2012).EMPLOYMENTMacroeconomic instability which is measured by inflation, causes an upward trend in saving. The season of high inflation and high unemployment, as well as cutting public benefits have raised income uncertainty and changed the expected future income of the economy (Chowdhurry, 2014).When an economy has a crisis, it leads to unemployment, and the risk of future uncertainty in income makes households save more (Zaman, Carannate, Ferra, 2013). When part of the households are affected with future uncertainty of income, it stimulates to low pray and consumption which would worsen the economic situation of the country. Financial crisis happens when labor market is distorted with high unemployment, changing households structure of saving portfolio. Any sort of financial crisis l eading to a recession would have a significant final result on household savings.ECONOMIC GROWTHGrowth models includes Harrod (1939), Domar (1946) states that economic growth is passing dependent on level of savings and output ration. These models indicate that increase in saving means high investment which stimulates economic growth. The availability of finances for investment increases as take of having higher savings (Sothan, 2014). The higher the level of saving rate leads to increased capital stock that in progress leads to a high level of output.Business CycleDifferent economies go through different patterns of ups and downs in the value of its sodding(a) Domestic Product (Riley, 2012). This business cycle has four phases namely boom, recession, depression, and retrieval. stinting boom has high consumer spending, profits, and investment. Unemployment tends to be low in this economic situation. Economic Recession has low level of consumer spending, income, and investment, a nd has a rising unemployment as businesses cut costs. Economic depression is when there is a declining GDP, showing weak level of consumer spending and investment, rapid rise of unemployment and prices starting to fall. Economic recovery is when economic situation starts to get better and consumers begin to increase spending and investment.Every countrys goal is for an economy to achieve a sustainable level of growth (Riley, 2012). Trend growth rate is what helps assess and compare the growth of the different economies.(Lequiller Blades, 2007)REVIEW OF RELATED LITERATUREEFFECT OF INFLATION ON SAVINGS RATEAlmost all the past literatures that were prime concerning the relationship of the variables inflation rate and savings rate concluded that the relationship between the 2 are coercive and significant. In a cross-sectional data on inflation rates and savings rates of various countries in the world, both certain and developing, the results obtained in the recent study showed that inflation rates of all the countries positively impacts each of the countries savings rate (Cheng Li, 2014). El-Seoud (2014) conducted a study on the effect of Gross Domestic Product, amour rate, and inflation rate on the national saving rate in the kingdom of Bahrain over the past 20 years. The researcher found that inflation rate has a positive relationship and significant impact on Bahrains saving rate in both the long contribute and short run. Similarly, Syden (2014) also found that in their study of South Africas 48 years of household savings data, inflation significantly creates a positive impact on the continents saving rate. As for the case of Turkey, Er, Tugcu, Coban (2014) used the Autoregressive Distributed Lag approach and the studys results indicated that there that inflation positively affects inflation rate and savings but there was no relationship of significance between inflation and savings in the short run. Using cardinal stage least squares model, the study of Chaturvedi, Kumar Dholakia (2009) on the relationship between economic growth, inflation, and saving rate in Asia revealed that inflation rate has a positive effect on the interest rates of the Asian countries as well. On the other hand, Heer Suessmuth (2006) utilized data of the inflation and saving rates from United States postwar block in order to analyze the monetary policy regimes of the three eras, namely the Pre-Volcker Era (65-78), Volcker Era (79-87), and the Greenspan Era (88-98). There appeared to be ambiguous results on the effect of inflation on the saving rates. In the Pre-Volcker Era and Greenspan Era, inflation negatively affected the saving rates. In the Volcker Era, on the other hand, inflation is positively associated with saving rates (Heer Suessmuth, 2006).EFFECT OF INTEREST RATE ON SAVINGS RATEEl-Seoud (2014) concluded from his previously mentioned study that the interest rate in Bahrain, just like inflation, has a positive and significant effect on the national saving rate in the short run. However, in the long run, El-Seoud (2014) saw that while the interest rate still has a positive relationship on Bahrains saving rate, this effect is now insignificant. On the other hand, in the results acquired from the study of Syden (2014) on South Africa, it showed that interest rate has a negative relationship and significantly impacts the saving behavior of South Africa. In a study on the Turkish economy, the researchers found that there was no significant relationship between interest rates and saving rate found in the long run (Er, Tugcu Coban, 2014).(Challe Ragot)(Romer)ReferencesEl-Seoud, M. S. (2014). The strength of Interest Rate, Inflation Rate And GDP On National Savings Rate. Retrieved from http//www.gifre.org/admin/papers/gjcmp/1-7-EFFECT-vol-3-3-gjcmp.pdfSyden, M. (2014). Trends and Determinants of Household Saving in South Africa. Economic Affairs 59(2) 191-208Cheng, Q. Li, X. (2014). cross-country Effects of Inflation on National Savings. Retrieved from https//smartech.gatech.edu/bitstream/handle/1853/52867/Cross-Country Effects of Inflation on National Savings(ECON3161).pdfChaturvedi, V., Kumar, B. Dholakia, R. H. (2009). Inter-Relationship between Economic Growth, Savings and Inflation in Asia. journal of International Economic Studies, No.23, 122. Retrieved from http//repo.lib.hosei.ac.jp/bitstream/10114/3628/1/23VaibhavChaturvedi-ather.pdfHeer, B. Suessmuth, B. (2006). The Savings-Inflation Puzzle. Retrieved from http//www.cesifo-group.de/pls/guestci/download/CESifo Working Papers 2006/CESifo Working Papers January 2006/cesifo1_wp1645.pdfEr, P. H., Tugcu, C. T. Coban O. (2014). Investigating The Link between Savings, Inflation and Economic Growth An ARDL Analysis for The Case of Turkey. Journal of Economics, Finance and Accounting. Vol. 1, Issue 2.Wachtel, P. (1977). Inflation, Uncertainty, and Saving Behavior since the Mid-1950s. Retrieved from http//www.nber.org/chapters/c9102.pdfBibliogra phyBande, R., Riveiro, D. (2012, October). Private Saving Rates and Macroeconomic Uncertainty Evidence from Spanish Regional Data. Iberian Regional Economics Network. Retrieved bump into 2015, from http//otega.usc.es/docs_idega/documentos_de_traballo/irene/irene_4.pdfChalle, E., Ragot, X. (n.d.). Precautionary Saving over the Business Cycle. Retrieved March 2015, from http//www.su.se/polopoly_fs/1.57517.1321520817/ChalleRagot.pdfChowdhurry, A. (2014, December). Terms of Trade shocks and Private Savings in the developing Countries. Journal of Comparative Economics. Retrieved March 2015, from http//dx.doi.org/10.1016/j.jce.2015.02.006Elmerraji, J. 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