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

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198 The Life-Cycle Hypothesis
30
25
Inflation
3-month
1-year
5-year
Inflation/interest rate
20
15
10
5
0
Date
Figure 6.8
Inflation and interest rates
year, and five-year deposits plus the time series of the annual rate of inflation. It
is apparent that interest rates do respond to inflation but with a lag and only partially.
A more precise answer is especially difficult because of the lack of information
for the interval from July 1993 to August 1996 which corresponds with
the most dramatic explosion of inflation (24 percent in 1994) and ensuing reabsorption
down to 7.5. Educated guesses about z suggests a negative value for k(3)
but of rather moderate proportion.
To summarize then:
1. According to the NIA measure of saving, inflation reduces C/Y (and increases
S/Y) by some 25 basis points per 1-percent inflation, because it increases C less
than Y. But this conclusion is highly misleading because the NIA measure is faulty
in the presence of inflation.
2. Corrected for inflation, income does not rise and therefore consumption
increases by k(3)pA, and saving by (z - k(3)pA*), presumably positive. However,
government saving declines by zpA*, so that national saving is reduced by the
increase in private consumption, k(3)pA* whose sign we are unable to ascertain
but is likely to be small.
3. Finally, inflation has a very large devastating effect on the value of the stock
of accumulation of real assets, reducing by an estimated 55 basis points per point
of inflation.