Financial Sector Development - Futile or Fruitful? An Examination of the Determinants of Savings in Sri Lanka

Abstract

Using dynamic econometric techniques the paper investigates the determinants of private saving in Sri Lanka with a primary focus on the role of financial sector development. Empirical evidence is obtained indicating the existence of the Ricardian equivalence hypothesis, and the significance of credit constraints on private saving. Most significantly, an index of financial sector development variables is constructed, based on measures of the relative size of the financial sector, the absolute size, and the activity of financial intermediaries. The index is found to have a significant positive influence on the level of private saving, giving support to the hypothesized nexus between saving and financial sector development. – saving ; financial sector development ; cointegration ; principal components ; Sri Lanka

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