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The Ageing, Longevity and Crowding Out Effects on Private and Public Savings: Evidence from Dynamic Panel Analysis

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Life-cycle theory predicts ageing exerting long-term macroeconomic impacts through the reduction of private savings. Ageing can be brought either through a fall in fertility rates or a rise in longevity. However, empirical research studying macroeconomic determinants of savings generally regard age dependency as the measure capturing the process of ageing, overlooking longevity exerting an opposite impact on private savings. Since longevity and dependency are correlated determinants of private savings, omitting either potentially causes omitted variable bias. This paper considers the joint effects age dependency and longevity have on savings. In contrast to the wider literature, not only private, but also public, savings was studied. Applying dynamic panel modelling techniques to a dataset of 55 countries from 1972-2004, age dependency is found to still exert a negative effect on private savings. However, it is found that some of these reductions can potentially be offset by increased longevity. The study also reveals some level of crowding out of private sector savings associated with changes in public sector savings and find that the Ricardian Equivalence Hypothesis cannot be entirely dismissed.

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Paper provided by School of Economics, University of Queensland, Australia in its series MRG Discussion Paper Series with number 3409.

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Handle: RePEc:qld:uqmrg6:34

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