Household Saving in France: Stochastic Income and Financial Deregulation

WP/94/136-EA
Household Saving in France: Stochastic Income and Financial Deregulation
by Jonathan D. Ostry and Joaquim Levy

In recent years, the household saving ratio in France has increased
substantially, offsetting some of the decline in the saving ratio that
occurred during the 1980s. This paper investigates the roles of two factors
in accounting for recent saving behavior in France. First, the
deterioration in labor market conditions may have created a precautionary
demand for saving by households wishing to insure themselves (by
accumulating assets, or saving) against potentially large (adverse) income
shocks (for example, becoming unemployed). Second, financial deregulation
may have increased the sensitivity of households to movements in real
interest rates, so that relatively high real rates would elicit larger
increases in saving than in the past.

To investigate the first hypothesis, the paper estimates a permanent-
income model of household consumption that has been augmented to include the
effects of the variability of household labor income. In such a model,
saving rises whenever the mean of household income is expected to decline
over time (saving for a rainy day) and whenever the variance of household
income is expected to rise (precautionary saving). This augmented
permanent-income model tracks recent developments in household saving
remarkably well. However, the saving for a rainy day component of saving
seems to play a much more significant role in recent developments than the
precautionary motive. Specifically, reductions in expected future income
growth seem to be quantitatively much more important than increases in the
expected variability of income in accounting for recent saving behavior.

On the effects of financial deregulation, the paper finds support for
the view that the interest rate elasticity of household saving has increased
significantly as a result of deregulation. Indeed, as a quantitative
matter, the results suggest that recent high levels of real interest rates
in France have played a significant role in stimulating household saving.