The purpose of this paper is to examine household saving and portfolio decisions in the dual financial system of Taiwan. First of all, we use a comparative statics technique to analyze household decisions and derive the reduced-form models for empirical research. Secondly, we use loanable funds theory to examine the effects of three policy measures on the savingsinvestment intermediation, these being the penalization of the curb market activities, their legalization, and interest rate deregulation. Thirdly, we design and conduct a survey of two-stage stratified random households to collect relevant data, with a sample size of 1030 households. With this data, we are not only able to estimate the volume of activities in the curb market but also make use of this information to apply further tests.
In these tests, we first use generalized least squares to estimate household saving and financial asset functions, and then use a probit model to estimate surplus household decisions on whether to participate in the curb financial market or not. In addition to the orthodox propositions, the empirical results also confirm that wealth has a negative effect on savings, and that the curb market interest rate has a positive effect on surplus household savings as well as on the decision to choose curb financial assets.
