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

Y. Hossein Farzin () and Ron Wendner ()

No 2014-04, Graz Economics Papers from University of Graz, Department of Economics

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 (Gomz, 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: Saving rate dynamics; non-monotonic transition path; hyperbolic discounting; short-term planning; neoclassical growth model (search for similar items in EconPapers)
JEL-codes: D91 E21 O40 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-mac
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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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