Global Journal of Human Social Science, E: Economics, Volume 21 Issue 4

The relative income hypothesis by Dusenberry (1949) states that the utility (satisfaction) derives from a given current consumption level is mainly depends on the status in the society rather than from the absolute level of income. Here consumer utility index depends on the ratio of consumption to a weighted average of the consumption of the other consumers. This hypothesis drew two conclusions: aggregate saving rate is independent of aggregate income, and the propensity to save of an individual is an increasing function of his or her percentile position in the income distribution. The permanent income hypothesis formulated by Milton Friedman in 1957 implies that consumption behavior responds primarily to permanent income. That is, consumers do not respond equally to all income shocks. People will spend money at a level consistent with them appears permanent income. A worker will save only if the change in income is transitory or higher than the anticipated level of permanent income. The Buffer-Stock Theory (Carrol, 1997) suggested that individuals set aside some precautionary reserve to avoid the unpredictable situation associated with future income fluctuation and smooth out future consumption levels. It assumes that consumers are impatient and prudent in the face of unpredictable income fluctuations. b) Empirical Literature Several empirical studies were conducted to find the relationship between interest rate and saving in different countries, but Bangladesh’s perspective I could not find any significant studies regarding this topic. There are different views regarding this relationship. Some authors found that the interest rate effect savings negatively (Athukorala and Long Pang, 2003,) and some revealed a positive relationship between these variables (Khan et al., 1994, Sarantis and Stewart, 2001, Richard and Kolluri, 2003). Joshua, et al. (2019) studied the interest rate effect on private saving by using the data of 135 countries from 1995 to 2014. They show that, a low interest rate can yield different effects on private saving under the different economic situations. If output volatility, old-age dependency, or financial development is above a certain threshold, the real interest rate affects the private saving negatively. Ojeaga et al. (2014), examined the effect of interest rates on customer savings behavior in the Nigerian banking sector, and revealed that interest rates were probably increasing bank deposits. Athukorala and Tsai (2003) investigated the determinants of household saving in Taiwan: Growth, demography, and public policy. They found that interest rate and savings positively related, whereas the relationship between inflation and saving is unfavorable. Siaw and Lawer (2015) examined the determinants of bank deposits in long run and short run in Ghana by using a co-integration approach and revealed that, in the long-run, inflation and the deposit interest rate have a negative effect on bank deposit. Mushtaq and Siddiqui (2017) investigated the effect of interest rates on bank deposits in Islamic and Non-Islamic economies for the period 1999 to 2014. By using the panel ARDL (Auto- regressive Distributed Lag) method, they revealed that there is no effect of interest rate on bank deposit in Islamic countries. In contrast, in Non- Islamic countries, interest rate and bank deposit are positively related. Ang (2009) studied the determinants of household savings in India and China. The study results supported the life cycle model that growth in income and inflation stimulates the growth in household savings. In contrast age dependency has the opposite impact on savings. Furthermore, the results suggested that the expected increase in pension benefits tended to encourage savings in India in the long run, whereas the reverse association was found for China. Loayza and Shankar (2000) examined the private savings trend in India by employing error correction model. They revealed that a significant positive association of per capita income, real interest rate, and agriculture share in GDP with private savings, whereas a significant negative association of financial development, inflation, and dependency ratio with the savings rate. Murshed & Robin (2012) investigated the impact of the financial liberalization policy on the Bangladesh banking sector from 1981 to 2008. They found that insignificant positive association between domestic savings and the real interest rate. Agrawal et al. 2007, studied saving behavior in South Asia. They concluded that the real interest rate positively affects the savings rate in Bangladesh and Nepal, whereas in India, Pakistan, and Sri Lanka, the effects are negative. Masson et al. (1998) examined a broad set of possible determinants of private saving behavior by using sample data for industrial and developing countries. They obtained both time-series and cross- sectional estimates. The results suggest that demographics and growth are important determinants of private saving rates, and interest rates and terms of trade have positive but less robust effects. Norman and Rashmi 2000, studied the private saving in India and found that real interest rate, Per capita income, and the share of agriculture in GDP has a positive effect on saving and financial development, inflation, and dependency ratio has a negative effect on saving in India. Abduh et al. (2011) found that the interest rate and growth in production level do not significantly drive deposit. Horioka (2009) investigated the saving behavior of the aged in Japan for 1990-2008. The author conducted the Family Income and Expenditure Survey Volume XXI Issue IV Version I 32 ( E ) Global Journal of Human Social Science - Year 2021 © 2021 Global Journals An Empirical Analysis of Interest Rate and Domestic Savings in Bangladesh