Long-Term Determinants of the Personal Savings Rate: Literature Review and Some Empirical Results for Canada

This paper examines the structural determinants of the personal savings rate in Canada over the last 30 years, using cointegration techniques. The main finding is that the real interest rate, expected inflation, the ratio of the all-government fiscal balances to nominal GDP, and the ratio of household net worth to personal disposable income are the most important determinants of the trend in the personal savings rate, as measured in the National Income and Expenditure Accounts (NIEA). The results also suggest that the rapid decline in the NIEA personal savings rate in recent years largely reflects a change in the trend component of the savings rate, rather than a transitory departure from the trend. In the current environment of low inflation and government fiscal balances moving into surpluses, the trend NIEA savings rate could remain low. When using a measure of the personal savings rate based on the change in the net worth position of the personal sector (as estimated in the National Balance Sheet Accounts [NBSA]), the trend is determined by the real interest rate, expected inflation, and the ratio of household net worth to personal disposable income. However, the statistical evidence supporting this long-run relationship is not as conclusive as that for the NIEA savings rate.