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

Recent Declines in the Savings Rate 131
higher expenditure, because of a favorable growth experience (it was the only
country with positive growth in the period), and because a reduction in inflation,
coupled with a large debt, produced a large reduction in the inflation adjustment.
On the other hand, Greece suffered the largest decline in saving (-12.2 percent),
well accounted for by the equation, as resulting from the largest decline in growth
and the second-largest rise in deficit. And Japan had an about average decline in
saving, mostly because of a slowdown in growth.
In general, the equation accounts well for the behavior of saving, though there
are exceptions. In the case of France, e.g. with the second-largest contraction in
saving (-8.2 percent), the equation estimates a large decline, but not large enough.
Even for the U.S., where, somewhat surprisingly, the decline in saving is not more
than average, the only significant explanation offered by the equation is the rise
in the budget deficit, reflecting both higher expenditure and lower taxes, which
however turns out to be inadequate to account for the decline.
On the whole, the evidence appears to be reasonably consistent with the LCH,
supporting its implications of a major role for income growth and fiscal policy.
3 A Brief Digression on the Role of Income and Other Variables
3.1 Income
In summarizing the foundations and aggregative implications of LCH, it was
pointed out that one of the significant and unusual consequences of that theory
is the independence of the aggregate saving ratio from the level of economic wellbeing
of the economy as measured, say, by per capita real income. This independence
is an implication of the postulate of homothetic preference. It was also
indicated that it has been supported by a number of tests, including some carried
out with the data used in the tests reported above. As a result, some recent studies
have not felt it necessary to test the possible role of that variable.
It should be noted, however, that the tests have typically relied on samples
heavily weighted with developed countries enjoying relatively high income,
simply because these are the countries for which reliable data are most likely to
be available.
But one may well question whether these results can be extrapolated to very
low income countries. For at least that portion of the population that lives at, or
near, the starvation level may find it impossible or too burdensome to set aside
resources now in order to provide for later consumption. People in that predicament
may tend to live more from hand-to-mouth, skipping retirement or being
supported by the extended family. It is thus conceivable that, for a sufficiently
low value of per capita income, the wealth-income ratio may tend to rise with