Income Inequality and Aggregate Saving: The Cross-Country Evidence

January 1996 No evidence is found to support the notion that income inequality affects aggregate saving across countries-neither in developing nor in industrial countries. Schmidt-Hebbel and Servén empirically review and analyze the link between income distribution and aggregate savings. Recent research has focused on the impact of income inequality and growth. Less attention has been paid to the link between inequality and saving. Once the conventional representative-agent framework is abandoned, consumption theory brings out channels through which income inequality can affect aggregate saving. Schmidt-Hebbel and Servén present new econometric evidence on the link between saving and inequality using new data on income distribution for a large cross-country sample. The results provide no evidence that income inequality affects aggregate saving across countries. This conclusion holds for both industrial and developing countries and is robust to changes in measures of saving, in income distribution indicators, and in functional forms. This paper-a product of the Macroeconomics and Growth Division, Policy Research Department-was prepared as part of ongoing research on the determinants of saving.