A Relative Answer to the Growth-Saving Puzzle

Gruber, Noam (2020): A Relative Answer to the Growth-Saving Puzzle.

Abstract

Prolonged rapid growth, i.e. a "catching-up" process, is known to be accompanied by high rates of household saving. This phenomenon is central in explaining the direction of international capital flows and trade imbalances in the past several decades, yet it is very much in contradiction to prevailing macroeconomic theory. This paper finds that a standard life-cycle model, even when integrated with uncertainty about future growth and credit constraints, is completely unable to replicate the relations between growth and saving as seen in the data. However, adding utility from relative consumption to the model allows for the full replication of these relations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Life Cycle, Saving Growth, Open Economy Growth, Household Saving, Life Cycle Models and Saving, Relative Income Hypothesis
• 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; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

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