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Saving and growth: another look at the cohort evidence

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  • Angus Deaton

    (Princeton University)

  • Christina Paxson

    (Princeton University)

Abstract

In recent years, as longer time series of cross-sectional household surveys have become available, it has become possible to look at the consumption and saving behavior of birth cohorts in a number of developing and developed economies. The cohort evidence is singularly appropriate for the analysis of life-cycle models of consumption because, at least in its simpler forms, the life-cycle hypothesis (LCH) predicts that the cohort average of the logarithm of consumption in any year can be additively decomposed into a time-invariant cohort effect and an age effect, both of which can be readily recovered from the cohort data by linear regression on dummy variables. The results of these cohort level analyses have not been favorable for the LCH interpretation of the international correlation between growth and saving. According to this, higher rates of economic growth drive up rates of national saving by expanding the lifetime resources of younger generations, who are saving, relative to the lifetime resources of older generations, who are dissaving. While it is typically possible to interpret the cohort results in a way that is consistent with the LCH, it is a good deal harder to rescue the prediction that higher growth means higher national saving rates, or at least that the effect is large enough to be consistent with the international relationship in which a one percentage point increase in the rate of per capita growth is associated with a roughly two percentage point increase in the saving rate. In Section 1, we review existing cohort studies from a range of rich and poor countries, and also present new results for Indonesia. This evidence shows no strong negative relationship between saving rates and age, so that when higher growth redistributes lifetime resources towards the young, the effect on savings is modest, and in some cases even negative.

Suggested Citation

  • Angus Deaton & Christina Paxson, 1998. "Saving and growth: another look at the cohort evidence," Working Papers 225, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  • Handle: RePEc:pri:rpdevs:deaton_paxson_saving_and_growth_among_individuals_and_households_res.pdf
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    References listed on IDEAS

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    1. Tullio Jappelli & Franco Modigliani, 2006. "The Age–Saving Profile and the Life-Cycle Hypothesis," Chapters,in: Long-run Growth and Short-run Stabilization, chapter 2 Edward Elgar Publishing.
    2. Fry, Maxwell J & Mason, Andrew, 1982. "The Variable Rate-of-Growth Effect in the Life-Cycle Saving Model: Children, Capital Inflows, Interest and Growth in a New Specification of the Life-Cycle Model Applied to Seven Asian Developing Count," Economic Inquiry, Western Economic Association International, vol. 20(3), pages 426-442, July.
    3. Paxson, Christina, 1996. "Saving and growth: Evidence from micro data," European Economic Review, Elsevier, vol. 40(2), pages 255-288, February.
    4. Angus S. Deaton & Christina Paxson, 1994. "Saving, Growth, and Aging in Taiwan," NBER Chapters,in: Studies in the Economics of Aging, pages 331-362 National Bureau of Economic Research, Inc.
    5. Orazio P. Attanasio & Hilary Williamson Hoynes, 2000. "Differential Mortality and Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 35(1), pages 1-29.
    6. Andrew Chesher, 1997. "Diet Revealed?: Semiparametric Estimation of Nutrient Intake-Age Relationships," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 389-428.
    7. Nancy Jianakoplos & Paul Menchik & Owen Irvine, 1989. "Using Panel Data to Assess the Bias in Cross-sectional Inferences of Life-Cycle Changes in the Level and Composition of Household Wealth," NBER Chapters,in: The Measurement of Saving, Investment, and Wealth, pages 553-644 National Bureau of Economic Research, Inc.
    8. Andrew Chesher, 1998. "Individual demands from household aggregates: time and age variation in the composition of diet," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(5), pages 505-524.
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    Cited by:

    1. Orazio P. Attanasio & Miguel Székely, 1998. "Household Savings and Income Distribution in Mexico," IDB Publications (Working Papers) 1299, Inter-American Development Bank.
    2. Jaime Saavedra-Chanduví & Martin Valdivia, 2000. "Household and Individual Decision-Making Over the Life Cycle: A First Look at Evidence from Peruvian Cohorts," Research Department Publications 3122, Inter-American Development Bank, Research Department.
    3. Jere R. Behrman & Suzanne Duryea & Miguel Székely, 1999. "Aging and Economic Opportunities: Major World Regions around the Turn of the Century," IDB Publications (Working Papers) 1306, Inter-American Development Bank.
    4. Chiuri, Maria Concetta, 2000. "Individual decisions and household demand for consumption and leisure," Research in Economics, Elsevier, vol. 54(3), pages 277-324, September.
    5. Orazio P. Attanasio & Miguel Székely, 1998. "Household Savings and Income Distribution in Mexico," Research Department Publications 4152, Inter-American Development Bank, Research Department.
    6. Orazio P. Attanasio & Miguel Székely, 1998. "El ahorro familiar y la distribución del ingreso en México," Research Department Publications 4153, Inter-American Development Bank, Research Department.
    7. Jere R. Behrman & Suzanne Duryea & Miguel Székely, 1999. "El envejecimiento y las oportunidades económicas: las principales regiones del mundo al final del siglo," Research Department Publications 4181, Inter-American Development Bank, Research Department.

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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