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

  • Farzin, Y. Hossein
  • Wendner, Ronald

The standard neoclassical growth model with Cobb-Douglas production predicts a monotonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition path of a country’s 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 observationally 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 Library of Munich, Germany in its series MPRA Paper with number 45518.

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Date of creation: 25 Mar 2013
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Handle: RePEc:pra:mprapa:45518
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  1. 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.
  2. Timo Trimborn & Karl-Josef Koch & Thomas Steger, 2006. "Multi-Dimensional Transitional Dynamics: A Simple Numberical Procedure," CESifo Working Paper Series 1745, CESifo Group Munich.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "The Poverty of Nations: A Quantitative Exploration," NBER Working Papers 5414, National Bureau of Economic Research, Inc.
  4. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  5. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  6. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  7. Litina, Anastasia & Palivos, Theodore, 2010. "The Behavior Of The Saving Rate In The Neoclassical Optimal Growth Model," Macroeconomic Dynamics, Cambridge University Press, vol. 14(04), pages 482-500, September.
  8. 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.
  9. Kent Smetters, 2003. "The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 697-707, July.
  10. Gong, Liutang & Smith, William & Zou, Heng-fu, 2007. "Consumption and Risk with hyperbolic discounting," Economics Letters, Elsevier, vol. 96(2), pages 153-160, August.
  11. Maddison, A., 1991. "A Long Run Perspective on Saving," Papers 443, Groningen State, Institute of Economic Research-.
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