Savings of Hungarian Households 1995 – 2000

The knowledge of the effect of decision making mechanisms of households on consumption and savings is crucial for the conduct of monetary policy, as household consumption accounts for 60-65% of the absorption side of GDP. In the narrow sense, monetary policy concerns itself with the following two questions in the analysis of saving decisions: - What, if any, effect do (real) interest rate changes have on the consumption of households? - What kind of factors influence the changes in the structure of savings? This paper also deals with broader issues, as apart from an analysis of the saving patterns of Hungarian households over the period 1995-2000, one of its main objectives is to pinpoint prospective developments in household sector saving over the medium term. It is based on the analysis of prevailing trends and international experience. Modern economics studies the potential effects of interest rate changes on household consumption and saving patterns in the framework of the life cycle theory (and its variants). Most central banks analyse the mechanism of monetary transmission using a macromodel which allows the simulation of the effect of interest rates changes on households. Unfortunately, for a number of reasons, the Hungarian data do not enable a similar econometric analysis to be made of the interest rate elasticity of consumption. First, there are no sufficiently long time series possessing the typical properties of such series: for example, quarterly data are only available for the period after 1995. Second, due to the transitional state of the Hungarian economy, the assumption of stable parameters seems unrealistic, and the shortness of the series makes the treatment of structural breaks rather cumbersome. Although it is possible to study consumption and saving patterns in the absence of a macromodel, the Hungarian data do not allow the use of other sophisticated econometric methods either, due to the above-noted problems. Short of the analytical study of this issue of vital relevance to monetary transmission, this paper aims to collect and present the available information relating to Hungary and describe relevant international experience. The first chapter sums up the international experience on household saving patterns in a number of countries discussed at length in the Appendix. The next chapter describes the main features of household financial wealth, i.e. financial assets and liabilities, and saving patterns in Hungary. It is followed by the assessment of the (potential) effect of interest rate change on saving decisions via an analysis of the substitution, income and wealth effects. Chapter four gives a detailed description of the changes in the structure of savings, touching upon the underlying reasons and the outlook for households’ financial wealth. The Appendix gives an in-depth analysis of the experiences of some countries which have taken a similar course. These case studies form broadly the basis of our conclusions about the prospective development of financial wealth. In respect of Hungary, we focus on the period 1995 to date, as all important long-term trends are believed to have originated during that period. Furthermore, there are also quarterly data available on this period, which enables us to examine developments within the real economy. When we found it relevant from the point of view of potential future developments, we have also added the experience of the early nineties.