EFFECT OF UNEMPLOYMENT,GDP

GROWTH, INFLATION AND INTEREST

RATE ON NATIONAL SAVINGS
SUBMITTED TO: RANA RASHID RAHMAN

Abstract:
GDP is considered the most important factor in any country and it has direct impact on National
Saving. This Paper examine the relationship of National Saving with Unemployment, GDP
Growth, Inflation and Interest rate. We use the STATA to examine the relationship through
Fixed Approach with Hougman Test. We also divide the Countries in to four Income group. We
found that in High Income Countries only GDP growth has a statistically Significant effect on
national Saving whereas in Upper Middle Income Countries GDP and Interest both effect the
national Savings.
Keywords:
National Saving, GDP Growth, Unemployment, Interest Rate, Inflation
Table of Contents
Introduction....................................................................................................................................2
Literature Review.......4
Study Gap 5
Methodology....... 6
Procedure....... 6
Results. 7
Worldwide Fixed Approach 7
High Income Countries ............ 8
Lower Income Countries............... 9
Lower Middle Income Countries. 10
Upper Middle Income Countries.. 11
Conclusion 12
References.12

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Introduction:
National saving is the most important factor for an economy national saving is the sum of private
saving and public savings. Private savings becomes after minus consumption and income tax.
Public saving becomes Government spending less from Government revenue.
The objective of this study to find out effect of GDP Growth rate on National savings. The
Hypothesis in this study is GDP growth rate has positive significant effect on national savings.
The reason for chosen this factor is that GDP has an effect due to all over country performance.
In this study panel data is used Took more than 150 countries as observations data is taken from
World Bank for authenticity. Stata is used for interpret the data and determine how significant
variable is.
Later on literature is briefly discussed and then provides data, Framework, methodology at the
last results and conclusions are given using the STATA.

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Literature Review

There are many studies conducted to examine the relationship of National Saving with important
macro economic factors such as Economic Growth, Inflation, Fiscal Policy, Interest Rate and
GDP, but most of them connected to Developed countries.

Developing countries and under developed countries have different connectivity with national
savings and it varies from country to country. In big economies and develop countries there is a
plenty of evidences that proves that growth and the savings are highly positive correlated. Due to
growth there is rise in savings. (Agrwall 2001).

Even consumer perspective concludes that if prices go high consumer spend more for maintain
their needs and savings go down due to high spending, so there will be negative significant
relationship between inflation and savings. (kazmi ,1993)

In this perspective there is an other dimension of inflation and savings. when prices of
commodities go up producer charge high and national savings goes up ultimately there is a
positively significant relationship. Government consumption and the income changes have
greatly affect the saving pattern. When government expenditures are high than government
revenues than it is cause a fiscal deficit it usually more affected in developing countries fiscal
polices designed by government savings. When there is a tough fiscal policy in developed
countries people start savings. It is also observed that in Pakistan during tight fiscal policy people
saving pattern goes up it is positively related. (vincellete, 2006)

Deficit Policies transfers the taxation rates to future eras, people live sufficiently long to make
the presumption for analyzing short-run reserve fund impacts and USA experience with managed
spending deficits concludes significant ambiguity that timing of taxes does not effect national
savings. (James M. Poterta, 1986).

Even interest rate and national savings has a ambiguous relation between them. In short run there
is positive relation and in future there is a negative relation. Increasing in the interest rate due to
increase in the savings and then it caused economic growth. (Mckinnon,1973).

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Variables related to their own country plays a minor part to judge the interest rate movements
whereas in cross country interest rates influenced and also suggest role of shocks are inversely
related to interest rate. (Jennifer C Smith, 1996).

In Asian countries interest rate has positively significant relation but there arent significant
relationship countries like Taiwan, India, Indonesia, Malaysia. Private savings has more
influence than as compare to domestic savings it is more positively related than domestic
savings. (loayza et al, 2000).

Even though economic growth and national saving has a positive relation between them if any
country economic growth goes above then there should be positive significant impact on the
national savings. (carrol and Weil 1994). But for some countries there is long run relationship for
growth and saving e.g. in UK and Sweden Anderson (1999) and for some countries short run
relation like USA.

Due to less saving and investments Pakistan economy and some other Asian economies rapidly
grow up. Thats the difference of growth rate between developing and under developing
countries. (Hussein ,1995)

There is a strongly positive relation of National Growth and national savings of the country.Due
to high savings caused capital accumulation and it turns to increase the economic growth.
(Deaton, 1995)
In deterioration in savings due to decrease in capital formation and it caused due to low GDP.So
it has significant impact of GDP on national saving and this study evaluate the growth rate of
GDP on savings in developed and underdeveloped countries from 1965 to 2010 and it shows
positively significant relation of GDP and savings. (Neda Mousavi, 2014).
Using Panel data of 85 developing countries conclude saving with economic growth has positive
relation with liquidity ration of GDP ratio, urbanization, inflation rate on the other hand foreign
debt has a negative relation. (Aghevli et al, 1990)

Study Gap:
In our research we did not study the only relation of inflation and national savings but also with
the GDP and interest rate and we are taking the 140 countries as there is no any such coverage of
all continents in the past as we included the Arab and African Underdeveloped countries in our
research study to compare the significance level of above variables on national saving based on
latest available data of year 2016.

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Methodology:

According to literatures correlation exists between National Saving and Inflation and there are
following reasons:
Inflation can uncertain the future income and it can lead to the Higher Saving.
Attempt to Gain a Target Level of income, saving will increase with inflation.
Countries with strong financial system lead to higher saving.

For this Project we take the data from World Bank and there are 150 counties data from 2005 to
2015 in shape of cross sectional which afterwards converted into the Panel Data Shape. We are
taking National Saving as Dependent Variable on the other hand Inflation, Unemployment, GDP
Growth and interest rate as Independent variable. So for this we create the total 1650 Excel rows
which contains the data of 11 years of 150 countries.
Hypothesis:
Ho= GDP has Positive Significant Impact on National Saving
Hi= GDP has no significant Impact on National Saving

To differentiate our work, we divide the countries into four income groups first High Income,
Lower Income, Upper Middle Income and Lower Middle Income group countries to show the
effect of Economic factors on National Saving.

Procedure:

To Check the effect of economic factors we use the STATA for Panel Analysis and firstly we run
the regression with random effect and then Fixed effect on all the countries after that we refine
the results through robust to minimize the effect of heteroskedasticity. And to select best from
fixed and random we run the Hausman test which helps us to select the most Effective.

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After that we arranged the countries through their Income Level and again we run the fixed
effect to get the results from each income level group.
Over All Worldwide Results:

Fixed Approach

We use STATA to run the regression model with random and fixed effect between National Saving and
Economic Factors. The resulting equation is
National Saving: 11.46+ -0.0012 inflation -0.1023unemployment +0.3085 GDP + 0.0535 Interest.

Results indicate that only GDP growth has significant impact on national savings with value of 0.00 rest
of the factors have no significant impact on national savings. These results are found after using Fixed

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approach in which that approach all individual factors of countries are minimized that may effect the
results.

High Income Countries Result:

In high income countries it is found that there is GDP growth has significant impact on national savings.
Because in these countries people have high incomes there isnt unemployment, inflation and interest rate
have no effect on high income people. So there is only factor of GDP Growth that has the overall factor of
country thats the reason it effects the national savings.

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Lower Income Countries Result:

In

lower income countries it is obvious that people has no savings because low income people hardly
survive so they have no savings. Results drive from Low income countries shows that there is no any
single factor that effects the National savings.
If we assume P-value 10 then inflation has significant impact on national savings otherwise there is no
any single factor that effect the national savings.

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Lower Middle Income Result:

In

lower middle income countries has very less numbers only 14 countries are listed in lower middle income

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countries. Results drive from data shows that there is no any single variable that effects the independent
variable National savings. All the independent are highly insignificant.
Upper Middle Income Countries:

In

upper middle countries results shows that there are two factors that effect significantly national savings.
GDP Growth rate and Interest rate with value of 0.000 and 0.20 respectively. Rest of the factors have
insignificant results shows on national savings.
In upper middle income countries have strong economies has low rate of unemployment and inflation so
thats the reason these two factors cannot effect significantly national savings.

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Conclusion

All over the results shows that each countrys saving is effected by according to its economic position.
We have concluded that countries with high income saving is effected by GDP growth and Interest rate.
Countries with Low income has actually Low savings so there isnt any significant impact from all these
independent variables. Overall world wide if we consider the most important factor that effects in all
results is GDP Growth factor.

Further, we analyzed that there might be some other variables that has also influence on national savings
are e.g. high income would lead to high savings and unemployment leads towards decrease in savings.
The correlation between GDP Growth and national savings would be beneficial to examine and useful for
countrys economic policy makers.
In this model regression supports our hypothesis and more than one variable shows its high influence on
national savings.

References:

Agrwal, P. (2001). The relation between savings and growth: Integration and Causality Evidence from
Asia, Bombay. Indira Gandhi Institute of Development Research.

Kazmi. (1993). National Savings Rate of India and Pakistan: A Macro Econometric Analysis.
The Pakistan Development Review,1313-1324.

Vincelette, Gallina A. 2006. Determinants of saving in Pakistan.

Poterba, J.M., Poterta, J.M., Summers, L.H., & Tobin, J. (2011). Finite Lifetimes and the Effects of
Budget Deficits on National Savings.

Mckinnon. (1973). Money and Capital in Economic Development. Brookings Institution

Smith, J.C., 1996. "Real Interest Rates, Saving and Investment

Loayza, S. K., & Serven, L. (2000). What Drives Private Saving Across the World. Review of Economics
and Statistics, 165-181

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Caroll, C., Weil, D., & Summers, L. H. (1993). Savings and Growth: A Reinterpretation. Paper presented
at the Carnegic-Rochester Public Policy Conference. Bradly Policy Research Centre April 23-24.

Hasnain. (2006). The impact of demography, growth and public policy on household savings: A case
study of Pakistan. Asia Pacific Development Journal, 13 (2), 57-71.

Deaton, A.S. & Paxson, C.H. Demography (1997) 34: 97. doi:10.2307/2061662

Neda Mousavi1, Mohammadreza Monjazeb2*-203 International Journal of Scientific Management and

Development 2014, Vol. 2, No. 9:425-431

Aghevli, B. B., & Boughton, J. M., & Motiol, P. J., & Villanueva,D., & Woglom, G. (1990). The Role of
National Saving in the World Economy: Recent Trends and Prospects. IMF, (67): 39-45.

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