Arbeitspapier

The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning

The standard neoclassical growth model with Cobb-Douglas production predicts a monotonically declining saving rate, when reasonably calibrated. Ample empirical evidence, however, shows that the transition paths of most countries’ saving rates exhibit a statistically significant hump-shaped pattern. Prior literature shows that CES production may imply a hump-shaped pattern of the saving rate (Goméz, 2008). However, the implied magnitude of the hump falls short of what is seen in empirical data. We introduce two non-standard features of preferences into a neoclassical growth model with CES production: hyperbolic discounting and short planning horizons. We show that, in contrast to the commonly accepted argument, in general (except for the special case of logarithmic utility) a model with hyperbolic discounting is not observationally equivalent to one with exponential discounting. We also show that our framework implies a hump-shaped saving rate dynamics that is consistent with empirical evidence. Hyperbolic discounting turns out to be a major factor explaining the magnitude of the hump of the saving rate path. Numerical simulations employing a generalized class of hyperbolic discount functions, which we term regular discount functions, support the results.

Language
Englisch

Bibliographic citation
Series: Nota di Lavoro ; No. 63.2014

Classification
Wirtschaft
Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
Macroeconomics: Consumption; Saving; Wealth
Economic Growth and Aggregate Productivity: General
Subject
Saving Rate Dynamics
Non-Monotonic Transition Path
Hyperbolic Discounting
Regular Discounting
Short-Term Planning
Neoclassical Growth Model

Event
Geistige Schöpfung
(who)
Farzin, Y. Hossein
Wendner, Ronald
Event
Veröffentlichung
(who)
Fondazione Eni Enrico Mattei (FEEM)
(where)
Milano
(when)
2014

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Farzin, Y. Hossein
  • Wendner, Ronald
  • Fondazione Eni Enrico Mattei (FEEM)

Time of origin

  • 2014

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