Effect of Income Inequality on Aggregate Saving : A Panel Analysis

Savings problem has become a crucial issue since it is one of the reasons of today's frequently-observed-financial crisis. There are several theories explaining this problem in the framework of consumption theory. Inequality in income distribution affects saving behavior. In this sense, our topic is substantial. As a matter of fact, if income inequality contracts savings, overcoming inequality should be held as a prior economic and social policy. In this study, the relationship between aggregate domestic savings as a ratio of GDP and GINI coefficient as an indicator of income inequality are tested under “Second Generation” type of panel cointegration analysis in order to take into account of the prospective existence of dependency between cross sectional units. The countries included in the analysis are grouped as developed, developing and miracle countries. Results reflect that the relationship depends on the country groups