Scribd Logo
Upload

Welcome to Scribd!

  • 410 views

    Savings and Investment

    Uploaded by

    Abhinav Dubey
    The document discusses several theories of savings and investment, including: 1) Prior voluntary savings theory which argues that investment is determined by savings and that all savings will find investment outlets. 2) Credit creation theory which argues that banks can create credit through fractional-reserve banking, stimulating investment beyond the level of savings. 3) Forced savings theory associated with Keynes which contends that investment determines savings and that inflation can induce higher savings. 4) Financial repression theory which holds that government interventions like interest rate ceilings can undermine savings and investment by creating distortions in financial markets. 5) Financial liberalization theory of McKinnon and Shaw which proposes that reducing such interventions through deregulation and higher

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Savings and Investment

    Uploaded by

    Abhinav Dubey
    410 views49 pages
    The document discusses several theories of savings and investment, including: 1) Prior voluntary savings theory which argues that investment is determined by savings and that all savings will find investment outlets. 2) Credit creation theory which argues that banks can create credit through fractional-reserve banking, stimulating investment beyond the level of savings. 3) Forced savings theory associated with Keynes which contends that investment determines savings and that inflation can induce higher savings. 4) Financial repression theory which holds that government interventions like interest rate ceilings can undermine savings and investment by creating distortions in financial markets. 5) Financial liberalization theory of McKinnon and Shaw which proposes that reducing such interventions through deregulation and higher

    Original Title

    29102709-Savings-and-Investment.ppt

    Copyright

    © © All Rights Reserved

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses several theories of savings and investment, including: 1) Prior voluntary savings theory which argues that investment is determined by savings and that all savings will find investment outlets. 2) Credit creation theory which argues that banks can create credit through fractional-reserve banking, stimulating investment beyond the level of savings. 3) Forced savings theory associated with Keynes which contends that investment determines savings and that inflation can induce higher savings. 4) Financial repression theory which holds that government interventions like interest rate ceilings can undermine savings and investment by creating distortions in financial markets. 5) Financial liberalization theory of McKinnon and Shaw which proposes that reducing such interventions through deregulation and higher

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    410 views49 pages

    Savings and Investment

    Uploaded by

    Abhinav Dubey
    The document discusses several theories of savings and investment, including: 1) Prior voluntary savings theory which argues that investment is determined by savings and that all savings will find investment outlets. 2) Credit creation theory which argues that banks can create credit through fractional-reserve banking, stimulating investment beyond the level of savings. 3) Forced savings theory associated with Keynes which contends that investment determines savings and that inflation can induce higher savings. 4) Financial repression theory which holds that government interventions like interest rate ceilings can undermine savings and investment by creating distortions in financial markets. 5) Financial liberalization theory of McKinnon and Shaw which proposes that reducing such interventions through deregulation and higher

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 49

    Savings and Investment

    Savings and Investment


    • Savings: Funds that are not used
    at the moment, balance of the
    income and spending

    • Investment: Resignation from


    current needs in view of future
    uncertain gains
    Financial System and Economic
    Development
    Input is Man Material, Machine and Money
    Money, credit and finance are life-blood of
    economic system
    Human and physical capital are its
    important sources and increase in them
    require higher and saving and investment
    The economic development greatly
    depends upon capital formation
    There is direct relation between capital and
    output
    Theories of Savings and
    Investment
    The Classical Prior Voluntary Saving Theory
    Credit Creation theory
    Forced Saving or Inflationary Financing
    Theory
    Financial Repression Theory
    Financial Liberalization Theory
    Prior Savings Theory (PST)
    Savings is determinant of investment
    All Savings in the economy can find investment
    outlets
    Appropriate monetary policy and fiscal policy for
    promoting and mobilizing savings for investment
    and growth
    Investment is an alternative to consumption
    Investment which is not financed by prior savings
    will generate inflation
    This theory does not subscribe to the view that
    inflation is needed
    This theory favors reasonably positive real
    interest rates to encourage savings by the public
    Cont…
    How to Achieve it:
    Some people whose expenditure are
    less then their incomes
    Others whose current expenditures
    exceeds their current incomes
    It is achieved by ultimate savers and the
    latter called the ultimate investors

    Income = Consumption + Savings


    Cont…
    The financial intermediaries achieve
    economies of scale in the cost of
    transferring savings to the investors
    through pooling of default risk and
    reducing transaction cost
    Financial institutions help development
    also by creating a efficient payments
    and transfer mechanism
    Credit Creation Theory
    In this theory financial system
    plays a positive and catalytic role
    by providing finance or credit
    through creation of credit in
    anticipation of savings
    The investment is financed

    through created credit


    Credit
    Creation
    Billa
    Two Sectors

    Publi
    c $
    Bank
    Public
    $

    Bank
    Assumptions
    Fractional reserve banking
    system
    Demand deposit only
    No excess reserves
    No cash leakage
    Illustration

    ?
    Required reserve
    ratio (RRR) =25%
    Pawan put $200
    into the bank as
    an initial demand
    deposit
    First Round
    First Round
    $200
    Publi $
    c
    Bank
    First Round
    $200

    Publi $
    c
    Bank

    $150
    Second Round
    Second Round
    $200
    $1
    Publi 50 $
    c
    Bank

    $150
    Second Round
    $200
    $150

    Publi $
    c
    Bank

    $112
    $150
    Third Round
    Third Round
    $200
    $150

    $112
    Publi $
    c .5
    Bank

    $112.5
    $150
    Third Round
    $200
    $150
    $112.5

    Publi $
    c
    Bank
    $84.4
    $112.5
    $112.5
    $150
    Nth Round
    Nth Round
    $200
    $150
    $112.5
    $84.4
    Publi $63 $
    .
    c .3.
    . Bank
    .
    $84.4
    $112.5
    $150
    Nth Round
    $200
    $150
    $112.5
    $84.4
    Publi $63 $
    .
    c .3.
    . Bank
    .
    $84.4
    $112.5
    $150
    Credit Creation
    1st round : $200
    2nd round : $150
    3rd round : $112.5
    4th round : $84.4
    5th round : $63.3
    6th round : .
    7th round : .
    Credit Creation

    Total
    ?
    Calculation of Credit
    Creation
    Bank multiplier 1
    = Required reserve ratio

    otal deposit increment


    = initial deposit x banking multiplier
    $
    Bank
    $
    Bank
    Remember

    ?
    Required reserve
    ratio (RRR) =25%
    Pawan put $200
    into the bank as
    an initial demand
    deposit
    Bank multiplier 1
    = Required reserve ratio

    =
    1
    25%

    =
    Total deposit increment
    = initial deposit x banking multiplier

    Total deposit increment


    = $200 x 4
    = $800
    The maximum amount
    of deposit created
    is $800
    $200
    RRR=25%
    Multiplier = 4
    Bank
    $800
    Theory of Forced Savings
    This theory emphasize on investment with forced
    savings
    According to Keynes and Tobin, investment is not
    determined by savings, it is savings which are
    determined by investment
    If the resources are unemployed it would
    increase aggregate demand, output and savings
    If resources are fully employed, it will generate
    inflation which will lower the real rat of return on
    financial investments, which will make real
    balances less attractive to hole and induce
    holder to investment physical capital
    Cont…
    Inflation changes income
    distribution in favor of profits earner
    , which would lead to increase in
    savings
    Inflation imposes tax on real money
    balances and thereby transfer
    resources to the Government for
    financing investment, this known as
    Inflation Tax Effect
    Limitations and dangers
     This concept of forced saving present inflation as a
    desirable phenomenon, which in real life, people fear
    inflation
     The alleged beneficial efforts of inflation can be
    repeated only if, inflation is unanticipated, while in real
    life, the public anticipate inflation to significant extent
     Inflation can induce undesirable pattern of investment
     Inflation means greater economic instability and,
    therefore, greater uncertainty and risk which can
    discourage investment activity
     Inflation may result in the reduction of exports, lower
    foreign exchange availability, adverse balance of
    payments and lower growth
     Inflation may increase forced savings but it may
    discourage voluntary savings
    Financial Regulation Theory
    Financial markets are prone to market
    failures
    There are certain forms of government
    intervention that will make then function
    better
    The lower interest rates through government
    intervention improves the average quality of
    loan applications and improves the efficiency
    Lending to sectors which are usually
    shunned by the market
    Cont…
    Conventionally, it is assumed that within any nation
    economy, there is a perfect capital mobility and
    interest rates across regions are equalized by the
    interregional arbitrage
    In practice market imperfections capital does not
    flow freely in the market across carious regions
    This creates a scope for financial market intervention
    to positively to affect regional development by
    correcting original misdistribution of capital
    The policy can help here by increasing the direct
    Ventral and state government investments in local
    economies
    Financial Liberalization
    Theory
    Financial liberalization for promoting
    financial and economic development
    According to McKinnon and Show, the
    developing countries are characterized by
    the government intervention and
    interference in the financial system
     These countries suffer from poor
    performance in respect of saving,
    investment and growth due to financial
    control, regulation, repression by authorities
    Cont…
    The indicators of financial repression:
    The existence of indiscriminate distortions in
    financial prices such as interest rates and
    exchange rates
    Imposition of interest rates ceiling or fixing
    nominal interest rates administratively
    resulting in low or negative real interest rates
    Prescribing high reserve ratios
    Instituting directed credit programmes
    Inefficient quantitative credit rationing
    Cont…
    Why Financial Liberalization
    The elimination of financial repression
    through financial liberalization,
    deregulation, privatization is essential to
    eliminate all the ill effects and distortion,
    and to put developing economies on high
    saving, high investment, and high growth
    path.
    Cont…
    Financial liberalization would result in
    Increase in interest rates on variety of
    financial asses as they would adjust to their
    competitive free-market equilibrium level
    Increasing in saving, reduction in the
    holding of real assets
    Expansion in the supply of real credit
    Increase in investment
    Increase in allocative efficiency of
    investment
    0

    -20
    -10
    10
    20
    30
    40
    50
    60
    1978
    1979
    1980
    1981
    1982
    1983
    1984
    1985
    1986
    1987
    1988
    1989
    1990
    1991
    1992
    1993
    1994
    1995
    1996
    Shares of public saving in total saving

    1997
    China

    1998
    1999
    2000
    India

    2001
    2002
    2003
    Private savings have risen in both countries

    45
    % of GDP

    40 China India

    35

    30

    25

    20

    15

    10

    You might also like