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The Saving-Investment Nexus: Why it Matters and How it Works

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Abstract

The causal relation between saving and investment has momentous implications for fiscal policy. If saving causes investment, this lends support for policies of fiscal austerity. Neither the national income accounts nor economic theory can resolve issues of causality. This paper presents a VAR analysis that examines the saving - investment relation. The principal findings are that investment spending is negatively impacted by personal saving and independent of government saving. Increases in personal saving have a negative effect on government saving. These patterns are consistent with the Keynesian paradox of thrift.

Suggested Citation

  • Thomas I. Palley, 1996. "The Saving-Investment Nexus: Why it Matters and How it Works," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 1996-01, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  • Handle: RePEc:epa:cepawp:1996-01
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    File URL: http://www.economicpolicyresearch.org/scepa/publications/workingpapers/1996/cepa0201.pdf
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    References listed on IDEAS

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    1. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-257, May.
    4. Eisner, Robert, 1991. "The Real Rate of U.S. National Saving," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 37(1), pages 15-32, March.
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    Cited by:

    1. Fabian Lindner, 2015. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," World Economic Review, World Economics Association, vol. 2015(4), pages 1-1, February.
    2. NGUENA, Christian L., 2011. "Heterogeneity of Saving-Investment Causality and Fiscal Coordination Implication: The Case of an African Monetary Union," MPRA Paper 49411, University Library of Munich, Germany, revised 31 Aug 2013.
    3. Nurhan Yenturk & Burc Ulengin & Ahmet Cimenoglu, 2009. "An analysis of the interaction among savings, investments and growth in Turkey," Applied Economics, Taylor & Francis Journals, vol. 41(6), pages 739-751.

    More about this item

    Keywords

    saving; investment; fiscal policy; paradox of thrift;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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