Liquidity Constraints and Consumer Impatience

In recent years significant changes have been observed in household saving and consumption behavior in several transition countries including Hungary. In the second half of the 1990s the financial saving rate fell markedly and household borrowing surged. These developments are not unique to Hungary, they correspond to the experience of other emerging countries, and they can be attributed above all to financial liberalization and modernization and the improving permanent income prospects of households, with prospective EU accession playing an important role in the improving income perception. We believe that declining saving rates and increasing indebtedness in accession countries will be important issues in the following years, even after joining the EU – as the example of less developed EU members shows. The phenomena of declining saving rates and increasing indebtedness are, of course, not unique to EU accession countries, they were observed in other emerging countries, too – e.g. in Latin America -, but these developments have special aspects in Eastern and Central Europe. One special aspect is prospective EU accession, which is perceived to be close and certain enough to contribute to the rise in future income expectations. Another special aspect is the reaction of other sectors of the economy to deteriorating net household position. Emerging market experience shows that declining household savings were offset by increasing corporate savings in some countries and by a rise in public savings in others (often along with a temporary deterioration of the current account). As Eastern and Central European countries wish to join the EMU as soon as possible, they will do their best to meet the Maastricht criteria, which involves limits on the budget deficit and public debt. This implies an additional incentive for the public sector to be the one that does the major adjustment to the decline in household saving rates in most accession countries. In this regard, we think that our paper is not only relevant for Hungary, but it has implication for other Eastern and Central European countries as well. The paper is organized as follows: Chapter 1 summarizes recent research on Hungarian household savings based both on macro indicators and survey data, while Chapter 2 gives a brief description of the evolution of Hungarian aggregate indicators for financial wealth, assets and liabilities. Chapter 3 analyzes data obtained from a special survey conducted in September 2000. The survey questions were supplied by the authors and were constructed to gain insight into prevailing liquidity constraints, consumer impatience, households’ attitude towards indebtedness, and to separate „financially relevant” households, i.e. households with financial assets and/or liabilities, because these are the groups that are most relevant for economic policymakers. The paper also contains estimations of the propensity to borrow. Based on the survey questions, special indicators, such as income tension, consumer impatience are constructed and used – among others - as explanatory variables in the regressions. The standard framework for analysis of household saving and consumption behavior is the life-cycle hypothesis. We do not aim to give a review of the life-cycle theory here, see Deaton (1992) or Browning and Lusardi (1996) for excellent surveys. Most empirical tests of the life-cycle hypothesis examine excess sensitivity and the significance of precautionary savings. Our paper has different aims, but it still relates to the life-cycle theory in several respects when we discuss the reasons for saving, consumer impatience, and the propensity to borrow.