What determines saving rates in Korea?

This paper investigates the extent to which income growth and uncertainty and demographic factors affect the domestic real saving rate in Korea. We test an extended life cycle hypothesis and demography hypothesis with Korean time series data from 1975 to 2002. The results of the tests show that the aggregate saving rate is positively affected by the moving average of the growth rate of income and the variance of the income growth. The positive effect of the income growth differs from the negative effect found household survey data were used. The young and the older age dependency ratios have negative effects on the saving rate, suggesting that the age structure of the population has an impact on aggregate saving rates. Also, foreign saving is found to be a substitute of domestic saving. The elasticities with respect to a change in the determinants are low. Given the projected changes in the dependency ratios, the domestic saving rate is expected to decline from 40% in 2002 to about 26% by the year 2030.