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A relative answer to the growth–saving puzzle

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  • Noam Gruber

Abstract

Prolonged rapid growth, that is, the ‘catching‐up’ process through which countries close the gap to the development frontier, is known to be accompanied by high rates of household saving. This phenomenon is central in explaining the direction of international capital flows and trade imbalances in the past several decades, yet it is very much in contradiction to prevailing macroeconomic theory. This paper finds that a standard life‐cycle model, even when integrated with uncertainty about future growth and with credit constraints, is completely unable to replicate the relations between growth and saving, represented by three stylized facts gleaned from the empirical literature. However, adding utility from relative consumption to the model allows for the full replication of these relations.

Suggested Citation

  • Noam Gruber, 2023. "A relative answer to the growth–saving puzzle," International Finance, Wiley Blackwell, vol. 26(2), pages 139-171, August.
    • Handle: RePEc:bla:intfin:v:26:y:2023:i:2:p:139-171
    DOI: 10.1111/infi.12426
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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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