Over the past decade, the world has seen a dramatic sequence of events involving the economy. From the dot com bubble to the housing bubble, we seen considerable effects on macroeconomic indicators but we will investigate one in particular. The personal saving rate is a unique macroeconomic indicator for the reason that it does not have the most predictable future. Taking a quick look at figure 1, we can see erratic fluctuations in the personal saving rate and specifically we see different trends in multiple recessions, which is what this paper is directed to expose. This paper will investigate the affect that recessions have on the personal saving rate, but specifically, will examine the Great Recession and its effect on the personal saving rate. There have been endless studies done on the economics of the Great Recession because it has been such a bear on the economy. More specifically for example, Mody, Ohnsorge, and Sandri, similarly investigate the high savings that the Great Recession seemed to portray in their paper, Precautionary Savings in the Great Recession. It is important to analyze and test, through regressionary analysis, the determinants of the personal saving rate and how it was effected by the Great Recession because it will further our knowledge going into the future. It may allow us to be more educated while applying public policies to further economic growth. It may even help individuals to make better decisions with their respective saving rates. In this paper and in the regressions, determinants of the savings rate will include Real GDP, credit card interest rates, interest rates, income per capita, government total expenditure, personal consumption expenditure, and the unemployment rate. It is quite evident that there are several more determinants for the savings rate, but they cannot all be included, thus they will be represented by the error term (u) in the regression. The first section will investigate literature that pertains to the personal saving rate and this topic, the second section will include my data, the third section will introduce the regression model, and the fourth section will interpret the evidence found from the model.
- Literature Review
- Precautionary Savings in the Great Recession, by Mody, Ohnsorge, and Sandri.
i. This article is quite similar to my topic. Precautionary savings refer to an individual predicting that he/she will not have income in the future, so they save. This article finds that greater income uncertainty will positively affects household savings. The independent variables in this paper’s model include the unemployment rate, lead of disposable income growth, real short term deposit rate, GDP volatility, and stock market volatility.
- What Drives Private Saving Across The World, by Loayza, Schmidt-Hebbel, and Serven
i. This article portrays the policy and non-policy determinants of the saving rate throughout several countries in the world. This article gave a good basis for picking the right variables in the model that will be used in this paper. It also shows the many different effects on the saving rate throughout different countries all over the world. My paper will narrow the variables down to just a single recession in a single country.
- The Great Crash on the Onset of the Great Depression, by Romer
i. This article shows that the question in my paper has relevance. This paper deals the uncertainty in the Great Depression and how it reduced consumer spending on durables and semi-durables. A question arising for future research would be whether the saving rate in the Depression decreased, but we are concerned with the Great Recession. Uncertainty, according to economic theory, drives the saving rate up.
- Ideal data for this model would include hundreds of independent variables because there are just so many things that effect the saving rate. The importance of an economic model is to find the main determinants of a single dependent variable and I believe I have done so below.
- My data includes the below:
i. Personal Saving Rate: This is the dependent variable
ii. Real GDP: Independent variable. GDP is the measurement I will be using to show that a recession exists.
iii. Credit card interest rate: when the interest rate rises, people should save more because having a credit card is less appealing.
iv. 30 year mortgage rate: when this rises people will save more because getting a mortgage is less appealing.
v. Income per capita: It could go either way. Will rely on regression and data
vi. Total government expenditure: This variable will represent the uses of fiscal policy and its effect on the saving rate. It is important to include this given Obama’s massive stimulus package, which should have a considerable effect on the saving rate.
vii. Personal consumption expenditure: Personal consumption is in direct relation to the saving rate because whatever is not saved, is consumed.
viii. Unemployment rate: Judging by a quick glance at the data, a higher unemployment rate should increase savings because there if someone is worried about their future income levels, they will save with that anticipation.
- Hypothesis: My hypothesis is that the Great Recession will significantly affect the personal saving rate in a positive manner because in the Great Recession, money was more scarce and people want to save in order to look out for their future.
- The above is my regression model for all dependent variables.
ii. I will run multiple regressions which include single and multi-variable regressions.
iii. By analyzing the coefficients, intercept, F-values, t-values, P-values, R-squared, etc. I will be able to come to a statistical conclusion about each and every variable
iv. Each beta will be tested at a 95 percent confidence interval. If 0 falls between the interval the variable is not significant.
- My evidence and findings will be presented and explained.
- Include the big highlights and major findings in the paper and present what the models did to explain why the saving rate did what it did and how the independent variables affected it.
i. Affirm of decline hypothesis: explain the results
- End with asking new questions about what should be researched next after such findings and explain how this is relevant and helpful to the world of economics.
“Amid Recession, U.S. Savings Rate Hits Highest Mark Since 1993.” PBS. PBS, 26 June 2009.
Web. 04 Oct. 2012. <http://www.pbs.org/newshour/updates/business/jan-june09/savingsrate_06-26.html>.
Bosworth, Barry, and Aaron Flaaen. “Financial Crisis American Style.” Asian Economic Papers
8.3 (2009): 146-170. EconLit. Web. 4 Oct. 2012.
“Federal Reserve Economic Data.” FRED. N.p., n.d. Web. 04 Oct. 2012.
Howard, David H. “Personal Saving Behavior And The Rate Of Inflation.” Review Of Economics
And Statistics 6.4 (1978): 547-554. EconLit. Web. 4 Oct. 2012.
Loayza, Norman, Luis Serven, and Klaus Schmidt-Hebbel. “What Drives Private Saving Around
The World?.” (1999): EconLit. Web. 4 Oct. 2012.
Mody, Ashoka, Franziska Ohnsorge, and Damiano Sandri. “Precautionary Savings In The Great
Recession.” (2012): 37 pages. EconLit. Web. 4 Oct. 2012.
Romer, Christina D. “The Great Crash And The Onset Of The Great Depression.” Quarterly
Journal Of Economics 105.3 (1990): 597-624. EconLit. Web. 4 Oct. 2012.
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