"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

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RECENT DECLINES IN THE SAVINGS RATE: A LIFE CYCLE
PERSPECTIVE
Franco Modigliani
Introduction
In the course of the last three decades, the national saving to income ratio, which
has traditionally been regarded as fairly stable at least in the medium run, has
undergone profound changes, especially among the industrialized countries.
These changes have tended to run in the same direction for all countries, namely
down. While this development has been very negative for the world economy, as
it has reduced the flow of resources available for investment and generally raised
interest rates, it offers a unique opportunity for the scientist trying to validate—
or reject—theories of aggregate saving behavior. The main purpose of this paper
is to rely on this episode to test whether and how far it can be explained by the
so-called Life-Cycle Hypothesis (LCH). We propose to show that, relying on that
framework, one can account fairly well for the unusual behavior of saving in
recent decades.
1 A Review of Theory and Facts
1.1 Recent Trends of National Saving
Table 4.1 presents the basic statistics on the national and private saving ratio for
the 21 OECD countries for which the necessary information could be gathered,
for the period 1960–1987. Since we are interested in studying long-run, rather
than cyclical, behavior, each observation for every variable in each country is an
average of many years: the years ’60 to ’70 for the first period (top of table 4.1);
’71 to ’80 for the second period (middle section); and ’81 to ’87 for the last period.
The row at the bottom of each section gives the average for all countries in each
period. It is seen that the national saving rate declined from an impressive level
Reprinted with permission from Rivista di Politica Economica 12 (December 1990), 5–42.