A Divisia Type Saving Aggregate for India Jha, Raghbendra; Longjam, Ibotombi S.

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Jha, Raghbendra ; Longjam, Ibotombi S.
india; financial savings; divisia aggregates
In India, the pace of financial innovation was relatively slow until the initiation of the financial liberalization program in 1991–92. The subsequent financial reforms have had important implications for the user costs of assets and resulted in significant substitution among them. Hence there is a need to develop an aggregate measure of savings that would more accurately reflect household choice over various assets than the simple sum. As user costs of assets change so does the composition of the financial savings aggregate. An advantage of monetary aggregates that are derived from such microeconomic models is that no a priori assumptions about the substitutability of assets need to be imposed. A Divisia aggregate has some theoretical advantages in this regard but since the estimation of this aggregate is computationally difficult, the extent of its superiority over the simple sum becomes an empirical question. In this paper we construct Divisia subaggregates of the financial assets of the household savings based on results from weak separability parametric and non-parametric tests. From these subaggregates we construct an overall aggregate of financial savings in India.
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