behavior mainly in the long term. The second group of variables used to describe savings during working life and dissavings during retirement are financial variables such as interest rates, inflation rates, available financial instruments, and initial wealth levels. These variables are significant as they dynamically affect the intertemporal consumption decisions of households.

The life-cycle model of household savings behavior, grounded in expected utility theory, is generally associated with Modigliani<sup>5</sup> and Friedman (1957). Modigliani and Friedman made their literary contributions by translating the abstract notion of an optimal consumption profile into a model that could be estimated econometrically (King, 1985). This demonstrated the empirical relevance of the separation of the consumption and income profiles, which is the principal implication of the life-cycle model. Modigliani stresses the role of wealth in the consumption function, Friedman’s concept of “permanent income,” and how both are based on the idea that current consumption is not determined primarily by current income.

Nevertheless, empirical tests of these two major hypotheses focused on cross-country studies that resulted in many drawbacks (Muradoglu and Taskin, 1996). The key challenge is the comparability of samples that include countries at different levels of development; this questions the reliability of these studies as far as interpreting differences across country groups.<sup>6</sup> Moreover, SchmidtHebbel, Webb, and Corsetti (1992) emphasized another great challenge that cast doubt upon using national aggregate savings data, assuming that the private savings account was a predominant part of total savings. They emphasized that aggregation of savings is inconsistent across countries, which resulted in a number of cross-country inconsistencies due to the difference in the methodology employed in their derivation. The following section provides a brief review of recent empirical literature on modeling savings behavior.

# **i) Recent Developments in Literature on Savings Behavior in Emerging and Developing Countries**

Kwakwa (2013) examines the key determinants of national savings using the Johansen cointegration technique as well as the error correction model for Ghana over 1975-2008. The empirical results show that in the long run, income and terms of trade have a positive and significant impact on savings while dependency ratio, political instability and the real interest rate have a negative impact on savings. In the short run, however, only terms of trade positively affects savings.

Awan et al. (2010) analyzes the long run and short run association among the real rate of interest on deposits, financial liberalization, economic growth, terms of trade, real remittances by Pakistani emigrants, and domestic savings behavior in Pakistan, using annual time series data for 1973-2007. The “Auto Regressive Distributed Lag Bounds Testing” approach is utilized to determine cointegration. The results reveal that real interest rate, financial liberalization, and economic growth positively affect domestic savings in Pakistan in the long run. The coefficient of the liberalization dummy is also positive and statistically significant, suggesting a need for increased liberalization and deregulation of interest rates for mobilization of savings. Conversely, the terms of trade and real remittances by emigrants show a negative relationship with domestic savings, thus supporting the Complementarity Hypothesis which was developed separately by Mckinnon and Shaw in 1973.

> 5 Modigliani & Brumbreg, 1954; Modigliani & Ando, 1957.

> 6 See Ortmeyer, 1985; Koskela and Viren, 1982; Schmidt-Hebbel and Servén, 2000; Beneston and Kauffman, 1990.

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