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

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  • Farzin, Y. Hossein
  • Wendner, Ronald

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 those cases in which 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 University Library of Munich, Germany in its series MPRA Paper with number 45518.

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Date of creation: 25 Mar 2013
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Handle: RePEc:pra:mprapa:45518

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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. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 339-57, April.
  3. Frank Caliendo & David Aadland, 2004. "Short-term planning and the life-cycle consumption puzzle," Microeconomics, EconWPA 0404003, EconWPA.
  4. Kent Smetters, 2003. "The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 697-707, July.
  5. Litina, Anastasia & Palivos, Theodore, 2010. "The Behavior Of The Saving Rate In The Neoclassical Optimal Growth Model," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 14(04), pages 482-500, September.
  6. 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.
  7. Trimborn, Timo & Koch, Karl-Josef & Steger, Thomas M., 2008. "Multidimensional Transitional Dynamics: A Simple Numerical Procedure," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 12(03), pages 301-319, June.
  8. Liutang Gong & William Smith & Heng-fu Zou, 2007. "Consumption and Risk with hyperbolic discounting," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 491, China Economics and Management Academy, Central University of Finance and Economics.
  9. Shafer, Jeffrey R & Elmeskov, Jorgen & Tease, Warren, 1992. " Saving Trends and Measurement Issues," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 94(2), pages 155-75.
  10. Maddison, Angus, 1992. " A Long-Run Perspective on Saving," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 94(2), pages 181-96.
  11. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
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