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

Recent Declines in the Savings Rate 119
assumption at least for the U.S. where the information is available. In fact if inherited
wealth rose systematically faster or slower than income, then we should
expect that the wealth-income ratio itself would rise or fall over time, whereas
the observed ratio appears to have remained remarkably stable for many decades
(at least since the beginning of the century).
But why should bequests, like life cycle saving, be a constant fraction of
income? It was shown in Modigliani and Brumberg [15] that for the proportionality
to hold it is sufficient that the following two conditions be satisfied. First,
even though “richer” people may tend to leave a larger fraction of their resources
than “poor” people (who may leave none), the proportion left should depend on
relative not absolute, life cycle resources. Second, the size distribution of life
resources should be reasonably stable over time. There is some empirical evidence
that appears consistent with these assumptions.
We can conclude that under the conditions stated above, the presence of
bequests, whether precautionary (and therefore unintended) or intended, does not
change the basic conclusions: the general model still implies that saving depends
on growth and not on income. Of course the ratio of bequests to life cycle saving
may reflect differential bequest behavior; and, other things equal, the larger
bequeathed wealth, the larger the wealth-income ratio and hence the larger the
saving ratio, for given growth (even though it should be realized that bequests
can, to some extent, have a depressing effect on life cycle wealth).
This raises the question of how important is bequeathed wealth relative to life
cycle wealth. I have concluded from a good deal of evidence that, for the U.S.,
the ratio of bequeathed to total wealth can be placed at between 1/4 and 1/5,
though this estimate has been hotly debated (Kotlikoff [11]). However, this issue
is irrelevant for our tests, since our concern is with the widespread fall in the
overall saving ratio. In any event information on the share of wealth that is inherited
is not available at present for almost any country. But this is not likely to be
too serious, since there are no grounds for thinking that the phenomenon under
investigation could be, to any significant extent, the result of a worldwide reduction
in true bequests whether due to legislation or to a spontaneous change in
preferences. And second, bequests or not, the growth rate and the other variables
mentioned remain major determinants of the saving ratio.
1.4.2 The Role of Government
In the traditional Keynesian model, introducing a government requires distinguishing
between national income and disposable income (income minus taxes)
and recognizing that national saving is the sum of government saving and private
saving. Private saving is defined as disposable income less private consumption,
and it is taken to be a function of disposable income.