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Saving and Growth: Evidence from Micro Data

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  • Christina Paxson

Abstract

This paper examines whether the observed cross-country correlation between aggregate saving rates and economic growth can be explained by models in which higher growth increases saving rates, rather than the other way around. The paper focusses on two explanations of why growth might increase saving. First, standard life-cycle theory implies that higher growth will increase the life- time wealth of younger savers relative to older dissavers, thereby increasing the aggregate saving rate. Second, models of consumption with habit formation imply that consumption responds slowly to unexpected income growth, and so unanticipated growth can produce a higher saving rate at least in the short run. I assess the validity of these explanations using time-series of cross-sections of household income and consumption surveys from four countries: the US, Britain, Taiwan and Thailand. I find that although in three out of the four countries there is evidence that saving behavior is consistent with life-cycle theory, there is simply too little life-cycle saving for higher growth to have a large effect on the aggregate saving rate. The habit formation model also implies very small effects of growth on saving rates. A large portion of the observed cross-country correlation between saving and growth cannot be explained by these models.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5301.

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Date of creation: Oct 1995
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Publication status: published as European Economic Review, vol. 40, no. 2, pp. 255-288, February 1996
Handle: RePEc:nbr:nberwo:5301

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  1. Christopher D. Carroll & David N. Weil, 1993. "Saving and Growth: A Reinterpretation," NBER Working Papers 4470, National Bureau of Economic Research, Inc.
  2. Poterba, James M. (ed.), 1994. "Public Policies and Household Saving," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226676180, March.
  3. Barry Bosworth & Gary Burtless & John Sabelhaus, 1991. "The Decline in Saving: Some Microeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 183-256.
  4. James M. Poterba, 1994. "Introduction to "International Comparisons of Household Saving"," NBER Chapters, in: International Comparisons of Household Saving, pages 1-10 National Bureau of Economic Research, Inc.
  5. Martin Feldstein & Philippe Bacchetta, 1989. "National Saving and International Investment," NBER Working Papers 3164, National Bureau of Economic Research, Inc.
  6. James M. Poterba, 1994. "Public Policies and Household Savings," NBER Books, National Bureau of Economic Research, Inc, number pote94-2, Ekim.
  7. Deaton, A.S. & Paxson, C.H., 1992. "Saving, Growth, and Aging in Taiwan," Papers, Princeton, Woodrow Wilson School - Development Studies 161, Princeton, Woodrow Wilson School - Development Studies.
  8. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198288244, October.
  9. Maddison, A., 1991. "A Long Run Perspective on Saving," Papers, Groningen State, Institute of Economic Research- 443, Groningen State, Institute of Economic Research-.
  10. James Banks & Richard Blundell, 1994. "Taxation and Personal Saving Incentives in the United Kingdom," NBER Chapters, in: Public Policies and Household Savings, pages 57-80 National Bureau of Economic Research, Inc.
  11. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, Ekim.
  12. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc.
  13. James Banks & Richard Blundell, 1993. "Household saving behaviour in the UK," IFS Working Papers, Institute for Fiscal Studies W93/05, Institute for Fiscal Studies.
  14. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(6), pages 1227-62, December.
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