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Frugality

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  • Evan Tanner
  • Yasser Abdih

Abstract

Household savings rates in the United States have recently crept up from all-time lows. Some have suggested that a shift toward frugality will hamper GDP growth-the Keynesian "paradox of thrift." We estimate that households compensate for a fall in their asset income by saving more out of their labor income, dollar-for-dollar. In the wake of the crisis, our model predicts that such primary savings will increase, but only temporarily and modestly, as household assets stabilize. As savings flows gradually accumulate, they help rebuild corporate net worth and hence firms'' capacity to make capital investments. A timely return to pre-crisis levels of capital investment would require that U.S. households save substantially more than the model predicts, starting now. Hence, we should fret that our savings rates may be too low.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/197.

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Length: 51
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/197

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Keywords: Economic models; Household credit; Income; Private investment; Private savings; equation; labor income; statistic; disposable income; consumer durables; cointegration; disposable labor income; statistics; equations; household net wealth; household net worth; permanent income; permanent income hypothesis; household consumption; personal disposable income; time series; household wealth; consumption function; standard deviation; investment spending; gross domestic product; government spending; standard errors; significance level; correlation; household income; private consumption; consumption patterns; general equilibrium model; consumer demand; regression analysis; optimization; standard error; consumer behavior; predictions; simulation model; maximum likelihood estimation; consumer spending; monte carlo simulation; consumption smoothing; econometrics; constant term; household budget; probability; capital consumption; constant mean; aggregate demand; statistical analysis; national income; hypothesis testing; general equilibrium;

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