Impact of household debt and household savings on economic growth

In this chapter, the empirical consequences will be presented and analyzed. However, before making so, the aim of this thesis will be re-emphasized. The impact of family debt and family nest eggs on economic growing would be analysed. Section 4.2 trades with the sample of 25 states selected for the period of 1995 to 2004. There is besides the theoretical account specification in the Section 4.3. The subdivision 4.4 is dedicated to panel informations accounts. Finally, Section 4.5 and 4.6 trade with the reading of the empirical consequences.

4.2 Sample of states selected

Table 4.2.1 below summarizes the list of states selected for the proving intent.

Data handiness has put terrible limitations on the figure of states. Ideally many more states should be taken into consideration to avoid prejudice ; nevertheless limitations on figures reduced the sample size to 25. Furthermore, one time once more following limitation on informations, the proving period under reappraisal has been for merely ten old ages get downing twelvemonth 1995 to twelvemonth 2004.

Table 4.2.1: List of States:


6. Danmark

11. Greece

16. Nederlands

21. Spain


7. Esthonia

12. Hungary

17. Norge

22. Sverige


8. Suomi

13. Italy

18. Poland

23. Switzerland


9. France

14. Japan

19. Portugal

24. United Kingdom


10. Germany

15. Korea

20. Slovak Republic

25. United States of America

Beginning: Writer ‘s calculation


In this subdivision, a theoretical account is developed to mensurate the impact of family debt and family economy among other factors, on economic growing. The theoretical account for growing for state I in clip T is as follows:

EGit= ? +?1 HDit + ?2 HSit + ?3 Rit + ?4 Pit + ?5 Cit+ ?6 Iit + Uit


EGit= Growth Rate of Real GDP per capita at changeless monetary values

HDit = Household Debt as a % of Gross Domestic Product ( GDP )

HSit= Household Savings as a % of Disposable Income

Rit = Interest on Savingss

Pit= Price Level of Gross Domestic Product ( GDP )

Cit= Consumption Share of CGPD ( GDP PER CAPITA )

Iit= Investment Share of CGDP ( GDP PER CAPITA )

Uit = the perturbation term

4.4: Panel Data

Panel information, besides called longitudinal informations or cross-sectional clip series informations, are informations where multiple instances ( people, houses, states etc ) were observed at two or more clip periods.

There are two sorts of information in cross-sectional time-series informations: the cross-sectional information reflected in the differences between topics, and the time-series or within capable information reflected in the alterations within topics over clip. Panel data arrested development techniques allow us to take advantage of these different types of information.

While it is possible to utilize ordinary multiple arrested development techniques on panel informations, they may non be optimum. The estimations of coefficients derived from arrested development may be capable to omitted variable prejudice – a job that arises when there is some unknown variable or variables that can non be controlled for that affect the dependant variable. With panel informations, it is possible to command for some types of omitted variables even without detecting them, by detecting alterations in the dependant variable over clip. This controls for omitted variables that differ between instances but are changeless over clip. It is besides possible to utilize panel informations to command for omitted variables that vary over clip but are changeless between instances.

4.4.1: Fixed v/s Random Effects theoretical account

Fixed-effects ( FE ) explore the relationship between forecaster and result variables within an entity ( state, individual, company, etc. ) . Each entity has its ain single features that may or may non act upon the forecaster variables. When utilizing Fixed Effect, we assume that something within the person may impact or bias the forecaster or result variables and we need to command for this. This is the principle behind the premise of the correlativity between entity ‘s error term and forecaster variables. FE removes the consequence of those time-invariant features from the forecaster variables so we can measure the forecasters ‘ cyberspace consequence

The general signifier of a panel arrested development is as follows:

Yit = ?i + ?Xit + ? T ( I )

Where Yit is the dependent variable of a peculiar state I at clip T

Xit is a matrix of explanatory variables of state I at clip T, ?i is the intercept term of state I

Because states are likely to change in several respects, single specific effects have to be allowed. This is handled by the fixed consequence theoretical account, which is one method of covering with panel informations set. Since states are likely to change, state specific effects imply that

?i = ? + ?i ( two )

Where ?i is the cross-sectional constituent of the error term and a is a changeless

Replacing ( two ) in ( I ) , we obtain

Yi = ? + ?Xit + ?i + ? it ( three )

The fixed consequence theoretical account assumes that ?i, the mistake term, will be fixed in perennial sampling. In other words, each state will hold a specific ?i.

On the other manus, the random consequence theoretical account is an alternate manner for covering with panel informations sets. In the random effects theoretical account, there are no specific effects. This implies that the error term ?i and the explanatory variable Xit will non be correlated, that is Xit and ?i are independent.

4.4.2: Hausman Specification Test

In order to find whether the fixed or random effects theoretical account is appropriate for our informations set, a Hausman trial is to be carried out. The trial evaluates the significance of an calculator versus an alternate calculator. It helps one evaluate if a statistical theoretical account corresponds to the informations and proving for correlativity between the regressors and the error term.

If the additive theoretical account Y = bX + vitamin E, where Y is univariate and X is vector of regressors, B is a vector of coefficients and vitamin E is the error term. We have two calculators for B: b0 and b1.

Under the void hypothesis, both of these calculators are consistent, but b1 is more efficient

( has smaller asymptotic discrepancy ) than b0. Under the alternate hypothesis, one or both of these calculators is inconsistent.

We can deduce the statistic: where T is the figure of observations. This statistic has chi-square distribution with K

( Length of B ) grades of freedom.

If we reject the void hypothesis, one or both of the calculators is inconsistent.

The hypothesis under trial is

H0: ? = 0 ( RE specification is acceptable )

H1: ? ?0 ( RE specification is invalid: Iron should be used )

If an undistinguished P-value is obtained ( P & A ; gt ; ?2 greater than 0.05 ) random effects must be used. However, if a important P-value is obtained, fixed consequence must be used.

However, the Hausman trial frequently leads to negative trial statistics caused by estimated parametric quantity discrepancy differences that are non positive semi-definite ( non PSD ) . In such instances, the absolute value of the statistic must be used which leaves the trial statistic asymptotically unchanged under H0. Furthermore, happening a non-PSD parametric quantity discrepancy difference with a negative trial statistic should non be interpreted as grounds in favour of H0.

4.5 Empirical Estimates

In this subdivision, the empirical consequences will be presented for the four arrested developments. Resultswill be that of the fixed consequence, random consequence and the Hausman trial.

4.5.1 Summary Statistic

Table represents the drumhead statistics for the variables of 25 selected states for the period 1995 to 2004.




Std Deviation






































Beginning: Writer ‘s Calculation

4.5.2: Consequences for arrested development ( 1 )

Table nowadayss the consequences of the fixed and random consequence theoretical accounts while Table studies the Hausman trial consequences. The tabular arraies are presented below.

Table Fixed and Random consequence consequences for arrested development ( 1 )

Dependant variable: GDP

Fixed Effectss

Random Effectss



( -3.57 )


( -5.19 )



( -3.09 )


( -3.94 )



( -2.45 )


( -0.82 )



( 5.94 )


( 3.49 )



( 0.86 )


( -2.74 )



( 1.41 )


( 2.03 )



( 1.58 )


( 2.55 )

R2 ( Within )



Beginning: Writer ‘s calculation

Valuess in parenthesis represent t-values for fixed effects and z-values for random

Hausman trial


Coefficients-Fixed Effectss

Coefficients-Random Effectss


























Beginning: Writer ‘s Computation ?2 ( 6 ) = 47.62 P- ?2 ( 6 ) =0.0000

Based on the Hausman trial, H0 is rejected. Hence, for the arrested development, the fixed consequence theoretical account will be most appropriate. Therefore, the fixed consequence consequences are discussed below.

4.6 Interpretation of empirical consequences and findings

It can be observed that the coefficient of nest eggs, debt, ingestion, investing are important while rising prices, involvement rate and the changeless term are all insignificant at the 10 % degree.

The coefficient of nest eggs is consistent with the theoretical literature which postulates that nest egg has a important function to play in finding economic growing in host states. The empirical consequence show that a 1 % additions in nest eggs negatively affects economic growing by 0.186 % in the selected states. Looking at the information for the family nest eggs ratio we find that it has been rather volatile over the last 15 old ages runing from over 13 % of disposable income in 1995 to merely 3 % of disposable income in 2004. It is noticeable that in recent old ages, families have chosen to salvage a lower per centum of their after-tax income than in old periods. Much of this has been the consequence of the roar in consumer adoption, including a immense degree of mortgage equity backdown from the lodging market.

Household debt is defined as consumer debt is consumer recognition which is outstanding and as per the empirical consequences, there is a negative coefficient for debt which suggests that a 1 % addition in debt will diminish economic growing by 0.336 % .The general tendency is that the nest eggs ratio has declined over the last decennary or more, a clip when both unemployment and involvement rates have besides fallen. If people have sensible outlooks of occupation security and if the rate of return on their nest eggs is lower than in the yesteryear, here are two grounds to salvage less and borrow more. The improbably strong demand for consumer adoption has tailed off in the last two old ages. The one-year growing in demand for consumer recognition exceeded 10 % from 1994 through to the center of 2005. The growing rate has since dipped aggressively lower ; possibly our love matter with the fictile card ( 40 old ages old in 2006 ) is coming to an terminal? In contrast, the rate of addition in borrowing secured on the value of belongings has remained really strong. Borrowing money represents dis-saving because it allows person to pass in surplus of their current income. The issue of consumer debt is a long-standing 1. It surely raises hazards for the economic system in the old ages in front because the accretion of debt creates the cost of serving this debt, 1000s of people have jobs in merely paying the involvement on their loans and the figure of personal insolvencies has reached a record high and therefore diminishing economic growing.

Consumption is assumed to be holding a positive relationship with economic growing. With addition in ingestion, consumers can profit from devouring more goods and services, so if ingestion degrees are high, prosperity will be bigger. Bettering in public services, if revenue enhancement grosss addition, the authorities can pass more on of import public services such as wellness and instruction, if the quality of wellness services improve, the quality of life will better every bit good. The addition in the production of goods and services hence provides room for exports along with rising prices due to demand pull inclinations. When rising prices in a state is higher than in other states, the currency becomes more expensive, exports become more expensive and exports will worsen or turn slower, take downing the economic growing. The coefficient of ingestion is negative and this determination is important at the 1 % degree. An addition in ingestion of 1 % will do economic growing to diminish by 0.219 % .

The determination that the coefficient of investing is both consistent with theory and statistically important is non surprising at all. Investment is normally a major determiner of economic growing and this has been confirmed by the consequences. Hence a 1 % addition in investing additions economic growing by 0.364 % . Economic historiographers have seen the richest states as those that were foremost in contriving and using capital intensive engineerings, in which machines embody the most advanced technological cognition ( Usher, 1920 ; Landes, 1969 ; Pollard,1982 ) . The history of economic growing is frequently written as if states and industries either seized the chance to escalate their specialisation in industries and grew quickly, or failed to prehend such chances and stagnated ( Rostow, 1958 ; Gerschenkron, 1962 ) .

The coefficient of rising prices is positive which implies that a 1 % addition in rising prices would increase economic growing by 0.00788 % . Though rising prices can take to uncertainness about the future profitableness of investing undertakings ( particularly when high rising prices is besides associated with increased monetary value variableness ) , this leads to more conservative investing schemes than would otherwise be the instance, finally taking to lower degrees of investing and economic growing. Having stated the theoretical possibilities, if rising prices is so damaging to economic activity and growing, so how low should rising prices be? The reply to this inquiry, evidently depends on the nature and construction of the economic system, and will change from state to state. Numerous surveies with several theories have been carried out, which specifically aimed at analyzing the relationship between rising prices and growing.

Mainstream economic experts nevertheless, by fall backing to assorted econometric surveies, cleaving to the position that up to a certain per centum addition in the consumer monetary value index, loose pecuniary policies of the cardinal bank can turn the economic system. Above this per centum it is argued, loose pecuniary policies are likely to weaken the economic system. This decision nevertheless, can non defy the trial of logic. For it implies that up to a certain rate of growing in the consumer monetary value index, the pecuniary pumping leads to ingestion that is preceded by production.

The changeless term is besides important at 1 % degree.

The coefficient of involvement rate is positive connoting that a 1 % addition in involvement rate would do economic growing to lift by 0.067 % . There is therefore a positive relationship between involvement rates and economic growing. The long-term inclination in the market is towards the equalization of returns ( monetary value spreads ) as enterprisers move to vie away net incomes. What the productiveness theory calls a scope of investings with different fringy productiveness values is nil more than a shelf of expected degrees of net incomes. And net incomes are maladjustments between supply and demand. This means that in a genuinely profitable steadfast factors of production are really paid less than the value of their fringy merchandises. The difference is economic net income.