The Variable Rate-of-Growth Effect in the Life-Cycle Saving Model

Abstract

The rate of growth in real GNP g affects the aggregate saving rate positively in life‐cycle saving models. This rate of growth effect is invariably estimated as the coefficient of g in the saving function. We show that other determinants of the saving rate influence the rate of growth effect. In other words, the rate of growth effect is not constant. Specifically, the real rate of return on financial assets and the population dependency ratio determine the timing of saving over the life cycle and, hence, alter the rate of growth effect. The dependency ratio also has an effect on the saving rate which is independent of g because it, together with the foreign saving rate, determines the level of saving over the life cycle.

Population Aging and Economic Growth in Asia

“…We would therefore expect changing age structure to be a possible explanation for this increase in aggregate saving. Studies that examine the link between demographic structure and national savings rates do fi nd a strong connection (Leff 1969;Fry and Mason 1982;Mason 1987;Mason 1988;Kelley and Schmidt 1995;Kelley and Schmidt 1996;Higgins and Williamson 1997;Higgins 1998) and suggest that a large part of the savings boom in East Asia can be explained by the changing age structure of the population.…”

Age structure and the current account

“…The relationship was confirmed in a cross section of a large sample of countries but his findings stirred some controversy. 1 Fry and Mason (1982) and Mason (1987Mason ( , 1988 rekindled interest in this relationship by looking at the savings rate as a function of the youth dependency ratio in addition to the product of this ratio and economic growth. Economic growth is included because the younger cohorts enjoy higher permanent incomes and higher consumption when labor productivity growth is positive.…”

Population, Wealth, and Economic Growth in the Asia and Pacific Region

“…Relying on variants of the life cycle model, several have used aggregate, cross-section, time series data to estimate the effects of age structure on aggregate savings (Mason 1981, Fry and Mason 1982, Mason 1988, Higgins and Williamson 1997, Higgins 1998, Bosworth and Chodorow-Reich 2007 and have concluded that savings rates will rise and then fall over the course of the demographic transition.…”