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

Y. Hossein Farzin () and Ron Wendner ()

No 178243, Climate Change and Sustainable Development from Fondazione Eni Enrico Mattei (FEEM)

Abstract: 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.

Keywords: Political; Economy (search for similar items in EconPapers)
Pages: 40
Date: 2014-07-15
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http://ageconsearch.umn.edu/record/178243/files/NDL2014-063.pdf (application/pdf)

Related works:
Working Paper: The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning (2014) Downloads
Working Paper: The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning (2014) Downloads
Working Paper: The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ags:feemcl:178243

DOI: 10.22004/ag.econ.178243

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