Examination of the relationship between financialization and national savings in Iran using the mixed frequency data sampling (MIDAS) approach

In recent decades, the increase in the financial sector, compared to the real sector of the economy, and the rising inflation have made individuals and firms invest part of their resources in the financial markets to earn money and maintain their purchasing power. Therefore, the financial sector has expanded significantly compared to the real sector and beset Iran's economy with the financialization phenomenon. Financialization is a process in which the increase in the income of non-financial firms due to their activities in the financial sector and the rise in the participation of individuals in financial activities motivated by profit leads to a significant expansion of the financial sector. The rising returns of the financial sector increase the attractiveness of investment and, hence, the financial sector income. The widening income gap between the financial and real sectors of the economy worsens the income distribution. Moreover, if investment in the financial sector leads to a reduction in investment in productive activities, economic growth in the real sector will decline. Therefore, there is a close relationship between financial sector performance, economic growth, and income inequality in the financialization process. Because the total savings is affected by economic growth and income inequality (Schmidt-Hubble and Seron, 2000), financialization affects the society's savings through economic growth and income inequality. The impact of economic growth is positive on savings; however, the influence of income inequality on savings varies according to the economic structure, income level, and financial market conditions of each country (Bofinger and Scheuermeyer, 2018). Consequently, the final impact of financialization on savings is ambiguous and depends on the net effect of economic growth and income inequality on savings.Therefore, understanding the impact of financialization on national savings allows policymakers to improve the national savings by adopting appropriate strategies to address the deficiencies of financial markets.

To analyze the relationships among the variables, following the work of Schmidt-Hubble and Seron (2000) and Gangor et al. (2014), national savings are considered as a function of the logarithm of financialization, logarithm of GDP, income inequality, real interest rate, and dependency burden logarithm. The ratio of the financial sector value-added to GDP is used to measure financialization following Van Arnum and Naples (2013). To convert the nominal data into real data, the consumer price index is used for the base year of 2004. The source of data is the Statistics Center and the Central Bank of Iran and includes the data of 1988-2020. In this study, the variables of GDP and financialization have a seasonal frequency, and the other variables have an annual frequency. Hence, the MIDAS approach is applied to examine the effect of financialization on national savings. Using the MIDAS approach, it is possible to estimate the coefficients of the variables with different frequencies (Noferesti et al., 2018).

The findings showed that the logarithm of financialization has a negative and significant effect on national savings in Iran. In other words, the expansion of the financial sector has led to a reduction in national savings. Also, the logarithm of GDP has a positive and significant effect on the national savings logarithm. Economic growth is considered a principal factor affecting savings. Increasing economic growth leads to an increase in national savings by raising the income of economic factors. The Gini coefficient leaves a negative and significant impact on the national savings logarithm. A rise in income inequality means an increase and a decline in the income of the rich and the poor, respectively. As income falls, people prefer to reduce their savings and maintain their current level of consumption. Since the number of the poor is more than the rich, in a country, the final effect of reducing the poor individuals' savings is greater than the effect of raising the rich individuals' savings. The real interest rate has a positive and significant impact on the national savings logarithm. With interest rates rising due to the enhanced attraction of investment, most of the income is allocated to saving. Finally, the burden of dependency has a negative and significant effect on the national savings logarithm. Increasing the dependency burden reduces the national savings due to increased consumption expenditures.

In Iran, the economic problems, rising inflation, and the expansion of the recession led investors and firms to increasingly invest their capital in financial markets to keep the power purchase and make a profit. Thus, the financial sector grew and expanded significantly compared to the real sector. The inefficiency of the financial system in the country led to the diversion of resources from productive activities to unproductive inflationary activities, despite the increase in firms and individual participation in financial markets. Therefore, along with the demand reduction of domestic products, financialization caused a decrease in the real sector production of the country. Firms of the real sector were forced to invest part of their capital in the financial section to prevent bankruptcy due to declining production and maintain the value of their capital in the face of inflation. Also firms reduced the production costs by decreasing wages and employment. Thus, a decline in the number of workers and economic growth with rising inflation resulted in a reduction in the real income of individuals and firms. As a result, the progress and expansion of financialization brings about a reduction in economic growth and national savings.