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

  • Y. Hossein Farzin

    ()

    (University of California at Davis)

  • Ronald Wendner

    ()

    (Karl-Franzens University of Graz)

The standard neoclassical growth model with Cobb-Douglas production predicts a mono- tonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition path of a countrys 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 observation- ally 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 of Graz, Department of Economics in its series Graz Economics Papers with number 2013-05.

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Date of creation: Mar 2013
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Handle: RePEc:grz:wpaper:2013-05
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  1. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Liutang Gong & William Smith & Heng-fu Zou, 2007. "Consumption and Risk with hyperbolic discounting," CEMA Working Papers 491, China Economics and Management Academy, Central University of Finance and Economics.
  3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  4. Caliendo, Frank & Aadland, David, 2007. "Short-term planning and the life-cycle consumption puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1392-1415, April.
  5. Maddison, A., 1991. "A Long Run Perspective on Saving," Papers 443, Groningen State, Institute of Economic Research-.
  6. Trimborn, Timo & Koch, Karl-Josef & Steger, Thomas M., 2008. "Multidimensional Transitional Dynamics: A Simple Numerical Procedure," Macroeconomic Dynamics, Cambridge University Press, vol. 12(03), pages 301-319, June.
  7. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1997. "The poverty of nations: a quantitative exploration," Staff Report 204, Federal Reserve Bank of Minneapolis.
  8. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  9. Kent Smetters, 2003. "The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production," NBER Technical Working Papers 0290, National Bureau of Economic Research, Inc.
  10. Shafer, Jeffrey R & Elmeskov, Jorgen & Tease, Warren, 1992. " Saving Trends and Measurement Issues," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 155-75.
  11. Anastastia Litina & Theodore Palivos, 2008. "The Behaviour of the Saving Rate in the Neoclassical Optimal Growth Model," Discussion Paper Series 2008_05, Department of Economics, University of Macedonia, revised Jun 2008.
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