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The saving rate fluctuations in Cyprus and the impact on income inequality dynamics


Savings and income inequality have an ambiguous correlation as identified in the literature. However, recent empirical analyses have found an impact on income distribution that adversely affects other macroeconomic variables over insufficient financing of investment spending. The latter may lead to slower growth causing significant economic adjustments.

During 2013, Cyprus was hit by the financial turbulence, vastly caused by the bail in on deposits above €100.000 and in conjunction with public finances challenges have led to a substantial downturn on savings, causing uneven income distribution that mostly affected the middle and the lower income deciles. Empirical data suggest that the correlation of savings with income inequality turns negative if the Gini coefficient exceeds 30% leading to increasing income inequality. Moreover, income inequality increases (reduces) saving, when credit availability is insufficient (sufficient).

The endogenous growth theory is visited to identify the correlation between the New Keynesian growth theories with the saving rate extended to income redistribution as a long-run remedy to restrict income inequality.

Cyprus has been a typical example where a very adverse financial shock of a very specific nature, induced by a preceding housing bubble led to an extremely high number of non-performing loans that distorted the financial sector instantly and substantially. This has led many households to nullify savings and experience financial uncertainty. This process, expanded the financial and public finances challenges causing a simultaneous financial and public finances crisis. 


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