Contents

List of Figures 11

List of Variables and Abbreviations 13

Introduction 19

Chapter 1. Stylised Facts of Saving

Paragraph 1.1 Data Sets and Statistical Issues 33
1.1.1 Various Saving Aggregates and Their Relationship 33
1.1.2 Macroeconomic Data Sources for the U.S. and Germany 34
1.1.3 Measurement Problems - Saving Offshore or Saving Out of Realised Capital Gains 361.1.4 Statistical Revisions 37
1.1.5 Microeconomic Data Sources for the U.S. and Germany 38

Paragraph 1.2 The Historic Path of Saving 40
1.2.1 General Trends in the OECD 40
1.2.2 Saving in the U.S. and its Various Components 40
1.2.3 Saving in Germany and its Various Components 44

Paragraph 1.3 Stylised Facts at the Macroeconomic Level 47
1.3.1 Real Income 47
1.3.2 Growth 49
1.3.3 Real Interest Rates 51
1.3.4 Inflation 52
1.3.5 Unemployment and Social Security Standards 54
1.3.6 Demographics 55
1.3.7 Inequality 55
1.3.8 Institutional Environment 58
1.3.9 Persistency 59

Paragraph 1.4 Stylised Facts at the Microeconomic Level 60
1.4.1 Macroeconomic Facts and Microeconomic Distributions 60
1.4.2 Saving Rates in Cross-Section 61
1.4.3 Current Income, Real and Relative 64
1.4.4 Permanent Income 72
1.4.5 The Distribution of Financial Wealth 74
1.4.6 Growth, Income Fluctuations and the Role of Expectations 79
1.4.7 Uncertainty and Precautionary Saving 83
1.4.8 Life-Cycle Patterns of Saving 85
1.4.9 Saving Motives 87

Paragraph 1.5 Summary: Stylised Facts of Saving 89

Chapter 2. Do Standard Models of Saving Match the Facts?

Paragraph 2.1 The Standard LCPIH 93
2.1.1 Basic Ideas of the Standard Approach 93
2.1.2 The Modigliani-Diagram 94
2.1.3 The Perfect Foresight Model in Discrete Time 97
2.1.4 The Perfect Foresight Model in Continuous Time 101
2.1.5 The Certainty Equivalent Model 104

Paragraph 2.2 The Empirical Failure of the Standard Models 108
2.2.1 Excess Sensitivity and Excess Smoothness - Ambiguous Results 108
2.2.2 MPC and Income Growth - Wrong Predictions 109
2.2.3 Incapability to Explain Saving Rate Differentials 110

Paragraph 2.3 Refinements: Allowing for Precautionary Saving, Liquidity Constraints and Habit Formation 112
2.3.1 Convex Marginal Utility and the Precautionary Motive 112
2.3.2 The Technique of Stochastic Dynamic Programming 113
2.3.3 The Buffer-Stock Model 116
2.3.4 Liquidity Constrained Consumers 120
2.3.5 Models Including Habit Formation 121

Paragraph 2.4 Do the Elaborated Models Perform Better? 125
2.4.1 Gain in Realism at the Cost of Predictive Power 125
2.4.2 Remaining Deficiencies 126

Paragraph 2.5 The Optimal Consumption Path - General Remarks 128
2.5.1 Hidden Assumptions and Fundamental Flaws 128
2.5.2 Arguments of the Utility Function - Wealth as an End in Itself 129
2.5.3 A Realistic Time-Horizon 131
2.5.4 The Representative Consumer 132
2.5.5 Per-period Consumption as a Single Entity 138
2.5.6 The Elasticity of Intertemporal Substitution 141
2.5.7 The Optimising Procedure - Benefits and Costs 145

Chapter 3. A New Approach to Saving Behaviour

Paragraph 3.1 Basic Needs and Saving 151
3.1.1 The Relative-Income Hypothesis 151
3.1.2 Subsistence Consumption in Developing Countries 152
3.1.3 Necessities in Developed Countries 156

Paragraph 3.2. Basic Needs in Standard Models 159
3.2.1 Introducing Good-specific Subsistence Points into a Standard Dixit-Stiglitz framework 159
3.2.2 Intertemporal Optimisation with Moving Subsistence Consumption 171

Paragraph 3.3 Modelling Saving Decisions by a Simple Rule of Thumb 178
3.3.1 The Necessity Share in Outlay and in Income 180
3.3.2 Determinants of Saving under the Proposed Rule of Thumb 181
3.3.3 The Aggregated Saving Rate under the Given Rule of Thumb 184
3.3.4 Factors Influencing the Propensity to Save and to Dissave 191
3.3.5 Summary: Model Predictions 192

Chapter 4. The Patterns of Consumption Shares

Paragraph 4.1 How to Identify Basic Needs? 197
4.1.1 Two Approaches to the His