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

122 The Life-Cycle Hypothesis
evidence has been found that different generations of one family live on anything
like the same scale (Altonji, Hayashi, and Kotlikoff [2]).
All this points, to the conclusion that Barro-like behavior cannot by any means
be universal, but is at best limited to a small minority. We therefore expect the
coefficient l to be below unity, contrary to Barro’s view. It should instead be
somewhere around Sterling’s estimate of 0.3; it could be somewhat smaller in
that not all consumers are likely to be rational enough to save now in view of
future taxes, but it could also be somewhat higher in so far as some portion of
those present may be responding to the higher taxes that will fall on later generations
by saving even more than called for by the Sterling estimate. Fortunately
these contrasting views can be tested by relying on the estimate of the coefficient
c of GS/(Y - T) in equation (4.5a).
Using the definition of c we find:
l =-c
[ 1- f( g)
]
and f(g) can be approximated by the mean saving ratio (0.14 in our sample).
(4.7)
2 Empirical Tests for the OECD Countries
2.1 Nature of Tests
The battery of tests reported below covers the last three decades: the sixties, the
seventies, and the eighties as far as available, namely 1987. For each country and
for each variable we compute an average value for each decade. Since there are
21 countries and three decades, we have a total of 63 observations on each variable.
We have performed three types of test: the first is based on a cross-section
time-series of the 63 observations; the next test is based on a cross section of the
21 countries for each decade separately; the third relies on a cross section of first
differences. We present two versions of this test. In one the observations are the
change in the value of each variable between the ’60s and ’80s; in the other the
changes are between the ’70s and ’80s.
2.2 Results—Level Tests
Table 4.3 reports the results of a number of tests of the life cycle and of the role
of fiscal variables. The first two rows test the variable that is the distinctive feature
of the life cycle model, namely income growth g. It is seen that the coefficient of
this variable is highly significant, as measured by the t-ratio. In line 1 of table
4.3, the estimated coefficient of g is somewhat lower than in line 2, but one may
suspect some downward bias in the former estimate because in our sample we find