Saving, growth, and demographic change in Korea

We use the data from the Family Income and Expenditure Survey and apply the synthetic cohort analysis to find if the rapid growth and the drastic demographic change that Korea experienced in the 1970s and the 1980s caused the sharp rise in her national saving rate. Applying the decomposition analysis and the synthetic cohort analysis, we find that the aggregation effects such as the effects of the change in the age structure of population and the change in the relative size of income across age cohorts cannot explain the rapid rise in the aggregate household saving rate in Korea. If growth and demographic change are responsible for the sharp rise in the national saving rate, it must have been through the microeconomic effect that raised the saving rate of every age cohort. We investigate the relative changes in housing prices and household income in the 1970s and the 1980s and find that the housing price hike combined with the high down-payment requirement is consistent with the rise in the saving rates across all age cohorts. In addition, the rapid economic growth combined with habit persistence as well as the drastic changes in demographic variables such as dependency ratio, fertility rate and life expectancy have the potential to explain the rise in the saving rates of all age cohorts. J. Japanese Int. Economies19 (3) (2005) 394-413.