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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).