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

Recent Declines in the Savings Rate 125
a positive association between growth and government saving, and the government
saving in turn should reduce to some extent private saving (equation (4.5)).
This suspicion is confirmed by the results in line 3, in which we add the fiscal
variable, government surplus. In line 3, the growth coefficient rises to 1.76, a value
close to that of line 1. These estimates of g are of interest for several reasons. First,
in the estimate, lines 2 and 3 are broadly confirmed by all the other results presented
in table 4.3. The estimates fall predominantly between 1.5 and 1.8 with
very few, usually explainable, exceptions, as indicated below. Second, it is consistent
with the results reported in various other contributions beginning with my
1970 paper. Third, this estimate is broadly consistent with the value suggested by
the LCH. As we have seen in equation (4.3b), the LCH implies a non-linear relation
between the saving ratio and g. In our tests we have approximated (4.3b)
linearly:
s = f( g)@ a+
bg
The slope b of this approximation might be expected close to f ¢ (ḡ ), the slope
of (4.3b) computed around the mean. By differentiation of (4.3b), the slope at
any value of g is found to be:
f¢( g)= d¢ ( 1-a) ( d¢+
g)
where:
d¢= d -ra
2
Modigliani and Brumberg, using simulation, found that (1 - a) could be placed
in the neighborhood of 0.3, and d¢ at around 0.07. The estimates have since been
broadly supported by direct time series estimated, e.g. for the US (Ando and
Modigliani [3]; Modigliani and Sterling [17]), and for Italy (Modigliani and Jappelli
[16]), though the estimates of d have sometimes been on the low side. Hence
the slope of (4.3b) at the mean value of g, which is around four percent can be
placed at 1.7 for d¢ =0.07 (1.8 if d¢ =0.06), quite consistent with our estimates
of the slope.
In line 3 of table 4.3 the government surplus, GS, appears with a significant
negative sign, implying that private saving is reduced by government saving. This
result is consistent with Barro and LCH, though it rejects the traditional Keynesian
formulation. The difference between LCH and Ricardian equivalence is in
the magnitude of the coefficient. If l were 1 as asserted by Barro, then from (4.5a)
the absolute value of the coefficient of GS should be 1 - f(g) = 0.86 in the sample,
which measures the long-run propensity to save, or somewhat less, if we adjusted
for the effect of deficit on private saving. The actual coefficient of GS is only
0.40. With a standard error of the coefficient of 0.11, the actual coefficient is seen