# **Real Income Growth Per Capita**

Theory provided various interpretations to the nature of the relation between private savings and income growth. The life-cycle theory of saving and consumption predicts that changes in an economy’s rate of economic growth will affect its aggregate saving rate. In the simplest version of the model, in which young people save for retirement, and old people consume their previouslyaccumulated assets, an increase in the rate of economic growth will unambiguously increase the aggregate saving rate. This is because of the observed increase in lifetime resources (and saving) of younger age groups relative to older age groups. Furthermore, Chow and Lin 1971, among others, supported this hypothesis. However, more complicated and realistic versions of the model yield ambiguous conclusions pertaining to the relationship between saving and growth. For example, young people may have low current income but high lifetime wealth, and may therefore borrow to finance current consumption.

Whether higher growth increases or reduces the aggregate saving rate depends on the respective age-profile of saving, which is an empirical matter and is negatively correlated with age (See Poterba (1994), Paxson (1996), Deaton and Paxson (1997) and Nwachukwu and Egwaikhide (2007)).

Following Modigliani and Brumberg (1954) and Modigliani (1998) the growth in the aggregate growth of real per capita income - not the level - is considered in the proposed setup as a determinant to private savings. The difference log of real per capita income is included in the model.

Real gross private savings and real income are both controlled for population growth - considering both variables in per capita terms. Due to the unavailability of high frequency data on population, the annual population count is used to index both quarterly series.

Accordingly, the nature and magnitude of the relation between growth and savings will be tested using Egypt’s data and provide an explanation to the ongoing debate.

# **Financial Development**

The earlier work of McKinnon (1973) and Shaw (1973) as well as the large body of contributions that followed assumed that financial development was indicative to the increased saving rate. Financial development policies called for elimination of credit ceilings, interest rate liberalization, ease of capital flows, enhanced prudential guidelines and supervision, and the development of capital markets.

Loayza and Shankar (2000) empirically show that – from a portfolio composition perspective - financial development allowed the private sector to increase long-term assets and durable goods within their portfolios of financial assets.

Loayza et al. (2000) propose that financial development has a direct short-run impact on saving rates and an indirect positive long-run impact. The direct effect goes through price and quantity channels. The price channel works through higher interest rates and, although popularly advocated in operational documents and the financial press, it is rarely effective in raising private saving— suggesting that the negative income effect of higher interest rates tends to neutralize their positive intertemporal substitution effect. Expanding access to credit to previously credit-constrained private agents allows households and small firms to use collateral more widely, and thus reduce 13