International evidence on how income inequality and credit market imperfections affect private saving rates

This paper empirically examines the hypothesis that income distribution exerts an independent effect on private saving rates across countries, and tests particular channels for income inequality to affect private saving rates. Cross-sectional and panel regression results show that inequality has a robust, positive effect on private saving rates that depends on financial market development and credit available to the private sector. The paper, thus, identifies credit market imperfections as the likely reason for the inequality-private saving link. The data provide no evidence supporting a subsistence channel for inequality to affect private saving as suggested by nonhomothetic utility functions. (C) 2001 Elsevier Science B.V. All rights reserved. JEL classification: D31; E21.