Inflation and the savings ratio across countries

Abstract

Using cross section data, the paper develops and tests the hypothesis that the savings ratio is positively related to the rate of domestic inflation as long as inflation is mild, but negatively related if inflation is excessive. ‘Optimum’ rates for inflation can be derived, but the point estimates in many samples are not significantly different from zero. The model developed tries to capture any distorting effect that foreign capital inflows may have on the inflation‐saving relation, and also tries to distinguish the inflation hypothesis from other traditional hypotheses such as the life‐cycle hypothesis and the Keynesian ‘absolute’ income hypothesis.

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