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

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  • Y. Hossein Farzin

    ()
    (University of California at Davis)

  • Ronald Wendner

    ()
    (Karl-Franzens University of Graz)

Abstract

The standard neoclassical growth model with Cobb-Douglas production predicts a mono- tonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition path of a countrys 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 those cases in which hyperbolic discounting is observation- ally 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 University of Graz, Department of Economics in its series Graz Economics Papers with number 2013-05.

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Date of creation: Mar 2013
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Handle: RePEc:grz:wpaper:2013-05

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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. Karl-Josef Koch & Timo Trimborn & Thomas M. Steger, 2005. "Multi-Dimensional Transitional Dynamics: A Simple Numerical Procedure," Volkswirtschaftliche Diskussionsbeiträge 121-05, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  2. 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.
  3. Frank Caliendo & David Aadland, 2004. "Short-term planning and the life-cycle consumption puzzle," Microeconomics 0404003, EconWPA.
  4. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  5. Gong, Liutang & Smith, William & Zou, Heng-fu, 2007. "Consumption and Risk with hyperbolic discounting," Economics Letters, Elsevier, vol. 96(2), pages 153-160, August.
  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1997. "The poverty of nations: a quantitative exploration," Staff Report 204, Federal Reserve Bank of Minneapolis.
  7. Maddison, Angus, 1992. " A Long-Run Perspective on Saving," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 181-96.
  8. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  10. Litina, Anastasia & Palivos, Theodore, 2010. "The Behavior Of The Saving Rate In The Neoclassical Optimal Growth Model," Macroeconomic Dynamics, Cambridge University Press, vol. 14(04), pages 482-500, September.
  11. Shafer, Jeffrey R & Elmeskov, Jorgen & Tease, Warren, 1992. " Saving Trends and Measurement Issues," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 155-75.
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