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The Saving-Investment Nexus: Why it Matters and How it Works

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Abstract

The causal relation between saving and investment has momentous implications for fiscal policy. If saving causes investment, this lends support for policies of fiscal austerity. Neither the national income accounts nor economic theory can resolve issues of causality. This paper presents a VAR analysis that examines the saving - investment relation. The principal findings are that investment spending is negatively impacted by personal saving and independent of government saving. Increases in personal saving have a negative effect on government saving. These patterns are consistent with the Keynesian paradox of thrift.

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File URL: http://www.economicpolicyresearch.org/scepa/publications/workingpapers/1996/cepa0201.pdf
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Bibliographic Info

Paper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. with number 1996-01.

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Length: 28 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:epa:cepawp:1996-01

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Keywords: saving; investment; fiscal policy; paradox of thrift;

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Cited by:
  1. NGUENA, Christian L., 2011. "Heterogeneity of Saving-Investment Causality and Fiscal Coordination Implication: The Case of an African Monetary Union," MPRA Paper 49411, University Library of Munich, Germany, revised 31 Aug 2013.

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