The Savings Multiplier

Mehlum, Halvor and Torvik, Ragnar and Valente, Simone (2016): The Savings Multiplier.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Overlapping generations, Growth, Savings.
• 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 > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

References

Acemoglu, D., Finkelstein A., Notowidigdo, M. (2013) "Income and Health Spending: Evidence from Oil Price Shocks", Review of Economics and Statistics 95: 1079-1095.

Alvarez-Cuadrado, F., Monteiro, G., Turnovsky, S. (2004) "Habit Formation, Catching-up with the Joneses, and Economic Growth" Journal of Economic Growth 9: 47--80.

Attanasio, O., Picci, L., Scorcu, A. (2000) "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries" Review of Economics and Statistics 82: 182-211.

Bai, C., Qian, Z. (2010) "The factor income distribution in China: 1978--2007" China Economic Review 21: 650--670.

Blanchard, O., Giavazzi, F. (2006) "Rebalancing Growth in China: A Three-Handed Approach" China & The World Economy 14: 1-20.

Carroll, C., Overland, J., Weil, D. (2000) "Saving and Growth with Habit Formation" American Economic Review 90: 341-355.

Chamon, M., Prasad, E. (2010) "Why Are Saving Rates of Urban Households in China Rising?" American Economic Journal: Macroeconomics 2: 93-130.

Deaton, A. (2010) "Understanding the Mechanisms of Economic Development" Journal of Economic Perspectives 24: 3-16.

Diamond, P. (1965) "National Debt in a Neoclassical Growth Model" American Economic Review 55: 1126-1150.

Eggleston, K. (2012) "Health Care for 1.3 Billion: An Overview of China's Health System" Asia Health Policy Program working paper # 28, Stanford University.

Finkelstein, A., Luttmer E., Notowidigdo, M. (2012) "What Good is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption" Journal of the European Economic Association 11: 221-258.

Galor, O. (1992) "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System" Econometrica 60: 1351-1386.

Hartwig, J. (2008) "What Drives Health Care Expenditure? Baumol's Model of Unbalanced Growth Revisited" Journal of Health Economics 27: 603-623.

ILO (2015). International Labor Office, Labor Statistics Database, laborsta.ilo.org (accessed October 2015).

James, E. (2002) "How Can China Solve it's Old-Age Security Problem? The Interaction between Pension, State Enterprise and Financial Market Reform" Journal of Pension Economics & Finance 1: 53-75.

Kraay, A. (2000) "Household Saving in China," World Bank Economic Review 14: 545-570.

Lewis, A. (1954) "Economic Development with Unlimited Supplies of Labor" Manchester School of Economics and Social Studies 22: 139-191.

Li, H., Li, L., Wu, B., Xiong, Y. (2012) "The End of Cheap Chinese Labor" Journal of Economic Perspectives 26 (4): 57-74.

Litao, Z., Sixin, S. (2009) "Old Age Care in China" EAI Background Brief No. 432.

Ma, G., Yi, W. (2010) "China's High Saving Rate: Myth and Reality" BIS Working Papers No 312.

Mehlum, H., Torvik, R., Valente, S. (2013) "China's Savings Multiplier" Working Paper Series 14713, Department of Economics, Norwegian University of Science and Technology (NTNU).

Modigliani, F., Cao, S. (2004) "The Chinese Saving Puzzle and the Life-Cycle Hypothesis" Journal of Economic Literature 42: 145-170.

Oksanen, H. (2010) "The Chinese Pension System - First Results on Assessing the Reform Options" Economic Papers 412, European Commission, Brussels.

Prasad, E. (2015) "The Path to Sustainable Growth in China", U.S.-China Economic and Security Review Commission, 22 April.

Rodrik, D. (2000) "Saving Transitions" The World Bank Economic Review 14: 481-507.

Song, Z., Yang, D. (2010) "Life Cycle Earnings and the Household Puzzle in a Fast-Growing Economy" Working Paper, Chinese University of Hong Kong.

Song, Z., Storesletten, K., Zilibotti, F. (2011) "Growing Like China" American Economic Review 101: 202-241.

Valente, S. (2009) "International Status-Seeking, Trade, and Growth Leadership" Canadian Journal of Economics 42: 554-589.

Yang, D. (2012) "Aggregate Savings and External Imbalances in China" Journal of Economic Perspectives 26 (4): 125-146.