The Savings Multiplier

We develop a theory of macroeconomic development based on the novel concept of savings multiplier: capital accumulation changes relative prices and income shares between generations, creating further incentives to accumulate and thereby rising saving rates as the economy develops. The savings multiplier hinges on two mechanisms. First, accumulation raises wages and leads to redistribution from the consuming old to the saving young. Second, higher wages raise the price of services consumed by the old, and the anticipation of such price rise prompts the young to increase their savings. Our theory captures important aspects of China's development and suggests new channels through which the one child policy and the dismantling of cradle-to-grave social benefits have fuelled China's savings and accumulation rates.