The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning

Farzin, Y. Hossein and Wendner, Ronald (2014): The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning.

Abstract

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 paths of most countries’ saving rates exhibit a statistically significant hump-shaped pattern. Prior literature shows that CES production may imply a hump-shaped pattern of the saving rate (Goméz, 2008). However, the implied magnitude of the hump falls short of what is seen in empirical data. We introduce two non-standard features of preferences into a neoclassical growth model with CES production: hyperbolic discounting and short planning horizons. We show that, in contrast to the commonly accepted argument, in general (except for the special case of logarithmic utility) a model with hyperbolic discounting is not observationally equivalent to one with exponential discounting. We also show that our framework implies a hump-shaped saving rate dynamics that is consistent with empirical evidence. Hyperbolic discounting turns out to be a major factor explaining the magnitude of the hump of the saving rate path. Numerical simulations employing a generalized class of hyperbolic discount functions, which we term regular discount functions, support the results.

• Item Type: MPRA Paper
• Language: English
• Keywords: Saving rate dynamics, non-monotonic transition path, hyperbolic discounting, regular discounting, short-term planning, neoclassical growth model
• Subjects: D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Ainslie, G. (1992), Picoeconomics, Cambridge: Cambridge University Press.

Antràs, P. (2001), Transitional Dynamics of the Savings Rate in the Neoclassical Growth Model, Mimeo, Department of Economics, Harvard University.

Barro, R.J. (1999), Laibson Meets Neoclassical in the Neoclassical Growth Model, Quarterly Journal of Economics 114, 1125—1152.

Barro, R.J., X. Sala-i-Martin (2004), Economic Growth, Cambridge MA, MIT Press.

Bosworth, B., G. Burtless, J. Sabelhaus (1991), The Decline in Saving: Evidence from Household Surveys, Brookings Papers on Economic Activity 1, 183—256.

Caliendo, F.N., D. Aadland (2007), Short-Term Planning and the Life-Cycle Consumption Puzzle, Journal of Economic Dynamics and Control 31, 1392—1415.

Caliendo, F.N., T.S. Findley (2014), Discount Functions and Self-Control Problems, Economics Letters, forthcoming.

Chari, V.V., P.J. Kehoe, E.R. McGrattan (1996), The Poverty of Nations: A Quantitative Exploration, NBER Working Paper 5414.

Christiano, L.J. (1989), Understanding Japan’s Saving Rate: The Reconstruction Hypothesis, Federal Reserve Bank of Minneapolis Quarterly Review 13, 10—25.

Findley, T.S., F.N. Caliendo (2009), Short Horizons, Time Inconsistency, and Optimal Social Security, International Tax and Public Finance 16, 487–513.

Findley, T.S., F.N. Caliendo (2014), Interacting Mechanisms of Dynamic Inconsistency, Journal of Economic Psychology, forthcoming.

Gómez, M.A. (2008), Dynamics of the Saving Rate in the Neoclassical Growth Model with CES Production, Macroeconomic Dynamics 12, 195—210.

Groth C., K.J. Koch, T.M. Steger (2010), When Growth is Less Than Exponential, Economic Theory 44, 213—242.

Hall, R.E. (1988), Intertemporal Substitution in Consumption, Journal of Political Economy 96, 339—357.

Laibson, D. (1997), Golden Eggs and Hyperbolic Discounting, Quarterly Journal of Economics 62, 443—477.

Leipziger, D., V. Thomas (1997), An Overview of East Asian Experience, in: D. Leipziger (ed.), Lessons from East Asia, Ann Arbor: University of Michigan Press.

Litina, A., T. Palivos (2010), The Behavior of the Saving Rate in the Neoclassical Optimal Growth Model, Macroeconomic Dynamics 14, 482—500.

Loayza, N., K. Schmidt-Hebbel, L. Servén (2000), What Drives Private Saving around the World?, Policy Research Working Paper 2309, Washington D.C.: The World Bank.

Maddison, A. (1992), A Long-Run Perspective on Saving, Scandinavian Journal of Economics 94, 181—196.

Schmidt-Hebbel, K., L. Servén (1999), The Economics of Saving and Growth: Theory, Evidence, and Implications for Policy, Cambridge: Cambridge University Press.

Shafer, J.R., J. Elmeskov, W. Tease (1992), Saving Trends and Measurement Issues, Scandinavian Journal of Economics 94, 155—175.

Smetters, K. (2003), The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production, Review of Economic Dynamics 6, 697—707.

Tease W., A. Dean, J. Elmeskov, P. Hoeller (1991), Real Interest Rate Trends: The Influence of Saving, Investment and other Factors, OECD Economic Studies 17, 107—144.

Thaler, R. (1981), Some Empirical Evidence on Dynamic Inconsistency, Economic Letters 8, 201-207.

Trimborn, T., K.J. Koch, T.M. Steger (2008), Multidimensional Transitional Dynamics: A Simple Numerical Procedure, Macroeconomic Dynamics 12, 301—319.