Despite much work, economists have not been able to quantitatively account for the differences in the Japanese and U.S. saving rates after World War II. In this paper, we show that the use of actual Japanese total factor productivity growth rates in a standard growth model generates saving rates that are reasonably similar to the Japanese data between 1956 and 2000.
This dissertation is devoted to understanding household saving rates of the two largest countries in the world - China and the United States. The first two chapters explain why the Chinese elderly save at extraordinarily high rates and the third chapter explains why the U.S. personal saving rate has been falling since 1980's.Chapter 1 explores the potential explanation of the high saving rates of the Chinese elderly. The high saving rate of China has attracted global attention. Furthermore, the saving rates of the Chinese elderly are especially high. Understanding why the elderly in China save at high rates is important for two reasons: (1) it partially explains the high aggregate saving rate in China, and (2) the fact that the elderly save more than the middle-aged contradicts the predictions of the life-cycle model. In this chapter, I present evidence that pension income is the primary explanation for the high saving rates of elderly Chinese households. I provide this evidence in two steps. First, I document three stylized facts that are consistent with this hypothesis: (1) saving rates are higher in years with higher pensions, (2) saving rates are higher for those with more generous pension plans, and (3) policy reforms that exogenously increase pensions also increase saving rates. However, a higher pension income on its own cannot explain the entire pattern because a household can simultaneously adjust its consumption. Therefore, in the second step, I demonstrate that concerns regarding future medical expenditures and bequest motives can explain why households do not increase their consumption commensurate with increases in pension income.In Chapter 2, I build and estimate a dynamic life cycle model for two purposes. The first is to quantify the effect of pension income. The second purpose is to carry out counterfactual policy simulations. The model is a standard life-cycle model with three main components. First, pension income is properly modeled to capture the increase observed in the data. The second part of the model is about uncertainty. In the model, I cover income uncertainty, health status and medical expenditures as the main source of uncertainty for the elderly. Finally, individuals have bequest motives. I estimate the model using the method of simulated moments. The estimation results show that it is possible to match the data with reasonable parameters. It is noteworthy that the estimated degree of relative risk aversion for the Chinese elderly is similar to that of U.S. population in other studies. This implies when factors including pension income, medical expenditures and bequest motives are properly taken into account, it is not necessary to assume Chinese elderly to be highly risk averse to explain their high saving rates. With the model, I am able to carry out various policy simulations. The most interesting simulation is if the Chinese pension and economy growth rate becomes similar to those in the United States, the saving rates of the Chinese elderly will fall to the level of the U.S.Chapter 3 is a joint work with Maurizio Mazzocco and Bela Szemely. In this chapter we provide evidence that most of the decline in the U.S. personal saving rate from 9 percent in the early eighties to 2 percent in 2007 can be explained by the steep increase in health expenditure experienced by the U.S. economy during the same period. The most convincing evidence is provided using the FDA approval of new drugs as a source of exogenous variation in medical expenses. Employing this source of variation, we find that a $1$ percentage point increase in health expenditure generates a decline in the U.S. saving rate that is between $0.58$ and $0.67$ percentage points. Using this result, we calculate that the rise in health expenditure explains about 83 percent of the drop in the U.S. saving rate. To evaluate whether households changed their consumption decisions to mitigate the effect of higher medical expenses, we develop a stylized model of household's and government's decisions. Using the model jointly with our empirical results, we find that the households' response to the rise in health expenses was negligible. This is why the saving rate dropped by a significant amount. Finally, with the objective of better understanding why households did not respond, we provide evidence on how the increase in medical expenditure was funded. We find that it was paid almost exclusively by an increase in government debt, a reduction in other government expenses, and an increase in employer contributions to health funds. The main implication of these findings is that the households were barely affected by the rise in health expenditure. The households' negligible response was, therefore, rational.
This paper considers the possibility that economic liberalization, by which is meant a reduction in tariffs, quotas, capital controls, and other government distortions of international transactions, may reduce private savings rates. A two stage approach is used to analyze a panel data set covering OECD countries during the past two decades. The conclusion is that there is a significant and robust relationship between economic liberalization and lower rates of savings. One implication is that at least part of the decline in savings rates in some countries over the past two decades may be explained by the liberalization process.
This paper considers the possibility that economic liberalization, by which is meant a reduction in tariffs, quotas, capital controls, and other government distortions of international transactions, may reduce private saving rates. A two stage approach is used to analyze a panel data set covering OECD countries during the past two decades. The conclusion is that there is a significant and robust relationship between economic liberalization and lower rates of savings. One implication is that at least part of the decline in savings rates in some countries over the past two decades may be explained by the liberalization process.
In this paper, we define The Chinese Saving Puzzle as the persistently high national saving rate at 34-53 percent of gross domestic product (GDP) in the past three decades and a surge in the saving rate by 11 percentage points from 2000-2008. Using data from the Flow of Funds Accounts (FFA) and Urban Household Surveys (UHS) supplemented by the findings from existing studies, we analyze the sources and causes of China's high and rising saving rates in the government, corporate, and household sectors. Although the causes of China's high saving are complex, we suggest that the evolving economic, demographic, and policy trends in the internal and external environments of the Chinese economy will likely lead to a decline in national saving in the foreseeable future.
The aim of this paper is to explain why a low and declining saving rate should be a problem in a world of free capital flows and increasing wealth. In Italy consumer households' saving have been the main driver of economic stability and growth, funding investments and public debt, and despite international turbulences Italy was acknowledged as a high saving country until the early 1990's. Ever since, however, households saving rate plunged, in spite of an increasing financial wealth, and our aim is to explain why: we suggest two main causes. The first is related to the economic policies implemented to deal with four major economic events, prompted by economic misalignments: a) the 1992's currency crisis, b) the run-up to the Euro, c) the 2006' turning point, preceding the 2008's crisis, and d) the 2009's public debt crisis and the following policy of fiscal consolidation. These four events were dealt with economic policies which overlooked the huge income and saving shifts from households to government and private sectors: rising tax burden, especially indirect taxes, freezing of nominal public expenditures and falling real wages were the main policy instruments, while a decreasing households' income and saving was a primary consequences. Households have been struggling to smooth their standard of life drawing on their saving and wealth, but the effort became all the more difficult as the saving rate was falling below a critical level, increasing the probability of negative saving and debt. Gross national saving turned less than aggregate investment, prompting an increasing borrowing from abroad and a corresponding negative current account. The second cause is structural and covers two crucial issues: the first is the deep economy impacts of a changing age structure, as a consequence of a sudden fertility drop. The second issue is related to the falling households size composition jointly with the rising share of quasi-fixed costs necessary for a decent life. We show how and why a well designed Welfare State could help to restore income stability and saving, tackling the widespread problem of changing age structure in most countries.
Latin American countries have long exhibited low levels of saving rates when compared to other countries in relatively similar stages of economic development (e.g., Asian economies). Motivated by this fact, this paper examines the time path of the saving rates between 1970 and 2010 in three Latin American countries - Chile, Colombia, and Mexico - through the lens of the neoclassical growth model. The findings indicate that two factors, the TFP growth rate and fiscal policy (via tax rates and government expenditure), are capable of accounting for some of the major fluctuations in saving rates observed in these years. For instance, the impressive increase in Chile's saving rate following the early 1980s debt crisis is likely to have resulted from a combination of high TFP growth and a tax reform that substantially reduced capital taxation. Counterfactual experiments also reveal that average saving rates in Latin America could have been some three percentage points higher, had the region experienced TFP growth similar to that of the Asian countries. This increase, however, is insufficient to bridge the observed gap between saving rates in the two regions.
