Intuitively, the interest rate has a positive effect on the demand for savings deposits. In the empirical studies conducted on Taiwan, however, this proposition has not been proved directly. This proposition has only been proved indirectly in a paper authored by Professor S.C. Tsiang – via the ratio relationship between savings deposits and the money supply. Other authors studying the same subject have found different empirical results. The proposition therefore remains an unsolved problem.
This paper contains both a theoretical analysis and an empirical examination of this subject.
Theoretical Analysis
We employ the state-preference theory with some rational assumptions, such as more wealth is desirable, etc. Under optimal conditions, we can derive the proposition that the interest rate has a positive effect on the demand for savings deposits. In the same theoretical framework, we also study the relationship between the interest rate, inflationary expectations and the demand for savings deposits.
Empirical Study
Through regression analysis, we have found that the relation between the interest rate and savings deposits is positive.
In this study, we present somewhat different empirical results from those found in other papers that have approached this topic directly. The justification for our results depends on the functional form used and the methods of treating variables; this has not been done in other studies. This may account for our diverging results.
Our main findings may be summarized as follows:
(1) A policy repressing interest rates might exert a negative effect on the demand for savings deposits.
(2) In periods of inflation, although the interest rate will rise, there may also be the possibility that the demand for savings deposits will tend to decrease. This phenomenon does not indicate that the interest rate has no effect on the demand for savings deposits, but that the interest rate adjustment is inadequate to offset the effects of inflation. By the same reasoning, we can infer the relationship between the interest rate and savings deposits in periods of disinflation.
