Inequality and Saving: Further Evidence from Integrated Economies

Renewed attention to inequality and saving has arisen owing to their pronounced implications for global imbalances and financial crises. We show that the relationship between saving and inequality is negative if savers' funds are borrowed by spending households for consumption as in the USA, but positive if saving is allocated through financial systems to investing firms for production as in China. This theoretical result is largely consistent with empirical evidence found from these two increasingly integrated economies and other related countries by estimating panel-data models. The policy implication is that inequality must be reduced in order to increase saving in the USA and other Organisation for Economic Co-operation and Development (OECD) countries and to boost consumption in China and other parts of emerging Asia.