SHARE   Share on Twitter Share on Facebook Email

Saving and Growth under Borrowing Constraints: -- Explaining the “High Saving Rate” Puzzle

This paper shows that uninsured risk and borrowing constraints can make an individual’s marginal propensity to consume negatively dependent on his/her permanent income. Therefore, higher income growth can lead to higher saving rates without requiring (or causing) high interest rates – in sharp contrast to implications of the permanent income hypothesis. For example, the model predicts that household saving ratio can rise from 5% to 25% when the annual rate of income growth increases from 1% to 10%, despite a fixed 1% real deposit rate. The predictions are consistent with the experience of emerging economies, such as Japan (in the 1950-70s) and China (over the past 30 years).

Read Full Text (666K)


Recently Viewed Series


Subscribe to our newsletter for updates on published research, data news, and latest econ information.
Name:   Email:  
Twitter logo Google Plus logo Facebook logo YouTube logo LinkedIn logo