Recent Declines in the Savings Rate: a Life Cycle Perspective

Abstract

In the course of the last three decades, the national saving to income ratio, which has traditionally been regarded as fairly stable at least in the medium run, has undergone profound changes, especially among the industrialized countries. These changes have tended to run in the same direction for all countries, namely down. While this development has been very negative for the world economy, as it has reduced the flow of resources available for investment and generally raised interest rates, it offers a unique opportunity for the scientist trying to validate—or reject—theories of aggregate saving behavior. The main purpose of this paper is to rely on this episode to test whether and how far it can be explained by the so-called Life Cycle Hypothesis (LCH). We propose to show that, relying on that framework, one can account fairly well for the unusual behavior of saving in recent decades.

I would like to thank Daniel Rodriguez for his assistance in the collection and organization of the data, and Michael Gibson and Arun Muralidhar for reading a preliminary version of the manuscript and providing constructive criticism.