# **Introduction**

Savings is alternatively defined as income minus consumption, the change in wealth, or the supply of capital. Given the comprehensive and consistent definitions of each of these terms, each definition of savings would represent the same concept and give rise to similar empirical measures (Gale and Sabelhaus 1999).

Understanding savings behavior is critical when designing economic policies that promote investment and growth. Most of the empirical literature that analyzes cross-country savings behavior concentrates on aggregate savings for a multitude of reasons. The first reason is due in part to the lack of consistent information on household behavior, as well as possible differences in the household savings in developing versus industrial countries (Loayza et. al. 2000).

The decline in savings will reflect on the state of economic growth and development. One interpretation asserts that the low savings rate will induce low savings behavior and will accordingly lead to low capital accumulation. On the macro level, it illustrates vulnerability of an economy’s dependence on foreign capital. At the micro level, it raises households’ fears to secure future consumption through pension systems for retirement or other purposes.

Another interpretation is that the sustainment of short-term aggregate demand is indicative of a low savings rate; however, worries that the savings rate will rebound tend to arise. The decline in personal savings, and the accompanying rise in consumption has helped fuel the economic expansion in the United States as well as propping up the global economy (Gale and Sabelhaus 1999).

Nordhaus (1996) proposed a third view asserting that current tools for measuring savings and investment are stone-age definitions in the information era. His view emphasized that measures of aggregate savings weakly correspond to the classical concept of savings. Accordingly, empirical analysis of different economic issues may require examining different measures of savings. In spite of that, his view supports the conceptual theory that low savings or higher consumption accelerates economic growth; however, both the minimal and poor quality of savings data makes it quite difficult to reach such conclusion when based solely on official savings aggregates.

While analysis of savings is significant to guide development policies in developing economies, it is challenged by quality of data and strength of the analytical framework and interpretation of empirical outcomes. With that being said, this paper will study savings behavior in the Arab Republic of Egypt. The next section provides a literature review of recent empirical literature on savings behavior in addition to earlier research on modeling savings behavior in Egypt. It is followed by a section describing the data and the empirical methodology. The last two sections include the analysis of the empirical findings and the conclusion.

# **Literature Review on Modeling Savings Behavior**

The Life Cycle Hypothesis (LCH) enriched the theoretical literature on savings. The key assumption of this hypothesis is that individuals spread their lifetime consumption evenly over their lives by accumulating savings during earning years and maintaining consumption levels throughout retirement. Therefore, tests of the life cycle hypothesis are mainly concerned with the effect of demographic variables such as age groups, birth rates, and dependency ratios on savings 2