Consumption Smoothing - Implications

Implications

  • Change in savings is a function of growth of labor income:


- any factor or policy affecting labor income growth will affect change in savings.
- income growth is dynamic leading to the disequilibrium model in Keynes saving and disaving
- Clower's dual decision hypothesis may help explain why unexpected changes in income makes consumers revise consumption and affect their change in savings


  • In practice, the relationship between change in savings and growth helps explain why:


- countries with rapid growth, e.g. those with trade surplus, have usually higher change in savings and countries with lower growth, e.g. trade deficit, lower change in saving. Net trade surplus countries such as Germany, China, Korea enjoy the highest gains in savings while countries such as U.S. loss in savings. Change in savings in Japan were high when trade was in surplus; now it is lower due to appreciation of Japanese Yen.
- depending on the intercept of savings vs growth, savings can turn negative even though growth is positive. Most economists, including Modigliani, have only considered growth vs savings, instead of change in savings. Case in point is the U.S. with positive growth and with saving rate bordering on negative.
- targeting a level of saving rate is meaningless, what matters is growth and change of savings.

Read more about this topic:  Consumption Smoothing

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