What Drives Private Savings in Malaysia?

ABSTRACT

This research attempts to reassess the long-run determinants of private savings in Malaysia using the cointegration and variance decomposition methods. This study covers annual data from 1980 to 2016. We find that private savings would increase together with the private disposable income, modified dependency ratio, and financial sector development. Results also reveal that the female–male sex ratio and macroeconomic uncertainty have a negative impact on private savings in Malaysia. Besides, the results show that disposable income, the sex ratio, financial sector development, and macroeconomic uncertainty are relatively more important than the other variables in determining Malaysia’s private savings.

KEY WORDS:

• cointegration
• gender
• macroeconomic uncertainty
• Malaysia
• private savings

JEL CLASSIFICATION:

• C32
• C51
• E21
• O16

Acknowledgments

We would like to thank the two anonymous referees for their constructive comments and suggestions to improve the earlier version of this research article.

Notes

¹ It is essential to point out here that the effect of interest rate on savings could be either positive or negative, depending on the strength of the substitution effect compared with the wealth effect. If the substitution effect is greater than the wealth effect, then savings and interest rate would be positively related. However, if wealth effect is stronger than the substitution effect, then savings is likely to be a negative function to interest rate. This is because people may view that a reduction in the interest rate will decrease their future income. Therefore, they tend to save more now in order to maintain their future standard of living.

² According to Tang (2008), $\mathrm{M}\mathrm{D}{\mathrm{R}}_t=\left({\mathrm{N}}_t-{\mathrm{L}}_t+{\mathrm{U}}_t\right)/{\mathrm{N}}_t$, where ${\mathrm{N}}_t$ represents the total population, ${\mathrm{L}}_t$ represents the total labor force, and ${\mathrm{U}}_t$ represents the number of unemployed people.

³ We conducted several diagnostic tests to verify the validity of the estimated long-run private savings model for Malaysia. We find that our model is free from serial correlation and heteroskedasticity problems. Moreover, the Jarque–Bera test suggests that the residuals are normally distributed. Finally, the Ramsey RESET test reveals no specification error or functionality problem. Hence, we can conclude that the estimated long-run private savings model as presented in Table 3 is valid and reliable for policymaking.

⁴ Apart from income inequality between genders, studies also found that females spend more than males on major household items such as food, health, education, and children (e.g. Cheah 2014; Hoddinott and Haddad 1995). Given this situation, females may save less compared to males.

Additional information

Funding

The support from the Universiti Sains Malaysia Short-Term Research Grant [304.CDASAR.6315109] is gratefully acknowledged.