Long-run Growth and Short-run Stabilization

Long-run Growth and Short-run Stabilization

Essays in Memory of Albert Ando

Edited by Lawrence R. Klein

There is much confusion in the economics literature on wage determination and the employment–inflation trade-off. Few model builders pay as much careful attention to the definition and meaning of long-run concepts as did Albert Ando. Expanding on years of painstaking work by Ando, the contributors elaborate on the main issues of economic analysis and policies that concerned him.

Chapter 2: The Age–Saving Profile and the Life-Cycle Hypothesis

Tullio Jappelli and Franco Modigliani

Subjects: economics and finance, econometrics


2. The age–saving profile and the life-cycle hypothesis* Tullio Jappelli and Franco Modigliani 1. INTRODUCTION The life-cycle hypothesis (LCH) posits that the main motivation for saving is to accumulate resources for later expenditure and in particular to support consumption at the habitual standard during retirement. According to the model, saving should be positive for households in their working span and negative for those in retirement, and wealth therefore should be hump-shaped (Modigliani, 1986). Yet, if one looks at the microeconomic evidence on household saving rates by age, dissaving by the elderly is seldom observed. To take just one example, in the introductory essay of a collection of country studies on saving, Poterba (1994) reports that in virtually all nations the median saving rate is positive well beyond retirement, concluding that ‘the country studies provide very little evidence that supports the Life-Cycle model’. Based on the country studies, Poterba also reports that the median saving rate in the age class 70–74 is 1.1 percent in the USA and 6 percent in Canada; and in Italy and Japan for those aged 65 and older it is even higher. These figures are inconsistent not only with the elementary version of the LCH, but also with more elaborate versions. In its basic formulation, the LCH posits that saving behavior is forward looking and driven by the desire to prepare for future expenditures above later income throughout life. The main foreseeable events in one’s life are old age and retirement. At this...

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