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Saving Rate Dynamics in the Neoclassical Growth Model – Hyperbolic Discounting and Observational Equivalence

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  • Y. Hossein Farzin

    (Department of Agricultural and Resource Economics, UC Davis, U.S.A, Oxford Centre for the Analysis of Resource Rich Economies (OxCarre), Department of Economics, University of Oxford, UK)

  • Ronald Wendner

    (Department of Economics, University of Graz, Austria)

Abstract

The standard neoclassical growth model with Cobb-Douglas production predicts a monotonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition path of a country’s saving rate exhibits a rising or non-monotonic pattern. In important cases, hyperbolic discounting, which is empirically strongly supported, implies transitional dynamics of the saving rate that accords well with empirical evidence. This holds true even in a growth model with Cobb-Douglas production technology. We also identify the cases where hyperbolic discounting is observationally equivalent to exponential discounting. In those cases, hyperbolic discounting does not affect the saving rate dynamics. Numerical simulations employing a generalized class of hyperbolic discounting functions that we term regular discounting functions support the results.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.42.

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Date of creation: May 2013
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Handle: RePEc:fem:femwpa:2013.42

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Keywords: Saving Rate; Non-Monotonic Transition Path; Hyperbolic Discounting; Regular Discounting; Commitment; Short Planning Horizon; Neoclassical Growth Model;

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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "The Poverty of Nations: A Quantitative Exploration," NBER Working Papers 5414, National Bureau of Economic Research, Inc.
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  7. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  8. Kent Smetters, 2003. "The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production," NBER Technical Working Papers 0290, National Bureau of Economic Research, Inc.
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