Saving Behavior in a Transition Economy: Evidence from Romania

Abstract: We investigate the causes of the individual propensity to save in a transition economy. The Life Cycle Hypothesis and the Precautionary Saving Hypothesis are two models explaining individual saving behavior. A potential problem, which is not dealt with in these theories, is that some people may be too poor to save; they choose to consume all their income today to survive, rather than to save for the future. We propose an alternative model, which incorporates a factor of necessary minimum consumption that must be reached before any saving can take place. We test the three theories in a transition economy, using data from Romania during the time period 1996-1998. Empirically, neither the Precautionary Saving Hypothesis nor the Life Cycle Hypothesis can sufficiently predict saving behavior in our sample. Instead, the minimum consumption constraint plays an important role in deciding whether an individual saves or not. Other factors, such as low accessibility to the banking sector and high costs of saving, could also cause the low explanatory power of the two theories in our sample.