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

The Chinese Saving Puzzle 195
marked with diamonds at the top of the graph is once again the observed saving
rate. The curve that hugs it closely is the saving ratio computed from the second
period equation, III.3, that is fitted to data from 1978 to 2000. It is apparent that
these computed values fit the actual out-of-sample data from 1953 to 1978
remarkably well, with moderate underestimation in 1962 to 1964.
On the basis of this result it seems justified to conclude that the LCH model
applies to the entire period with reasonably stable parameter estimates, despite
the very notable changes in the underlying economy.
The third curve shown in figure 6.7 is an analogous test of stability of coefficients
for the traditional Keynesian linear model. That is, we fit this model to the
years 1978–2000, and find that this fit is bearably good though it misses the later
decline. When we use the parameter estimates from the second period to compute
the first period saving ratio, the result is a total failure; if saving were controlled
by income the rise would have been much faster and there would have been a lot
of “dis-saving” with the very low initial income. But the observed behavior is
accounted for when Keynesian income is replaced by LCH variables, income
growth, and population structure.
5.2 Comparison with Earlier Studies—A Survey
There are two major studies of which we are aware that have endeavored to test
the LCH and estimate its parameters. First, Modigliani (1970) used a sample of
36 countries for which data were available from the UN Yearbook of National
Account Statistics to test whether cross-country variations in the saving ratio
could be accounted for by differences in growth rates and demographic structure,
as hypothesized by LCH, instead of by differences in per-capita income according
to the traditional view. This sample, which includes countries of quite varied
backgrounds, is referred to hereafter as Cross I.
The second essay is Modigliani (1990) (hereafter Cross II), which used a
sample of 21 OECD countries for a cross-country test of the forces accounting
for the remarkable decline in the average saving ratio from 17 percent in the
period 1960–70 to 10 percent in 1981–87, and it included inflation among the
explanatory variables. The major conclusions from a comparison of the present
study with the previous two are summarized as follows.
5.2.1 Long-Term Growth
This crucial LCH variable is found to play a major explanatory role in every case,
with t-values running as high as eight (eleven in this study). As for the magnitude
of the effect, the estimates for China, of around 2 percentage points increase
in S/Y per 1-percent long-term growth, or a bit larger for the second period, agree
quite well with those of Cross I—a little below two when growth is approximated