Saving Rate Dynamics in the Neoclassical Growth Model – Hyperbolic Discounting and Observational Equivalence

39 Pages Posted: 26 Mar 2013

See all articles by Y. Hossein Farzin

Y. Hossein Farzin

University of California, Davis - Department of Agricultural and Resource Economics; Oxford Centre for the Analysis of Resource Rich Economies (OxCarre)

Ronald Wendner

University of Graz - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2013

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 path of a country’s saving rate exhibits a rising or non-monotonic pattern. In important cases, hyperbolic discounting, which is empirically strongly supported, implies transitional dynamics of the saving rate that accords well with empirical evidence. This holds true even in a growth model with Cobb-Douglas production technology. We also identify those cases in which hyperbolic discounting is observationally equivalent to exponential discounting. In those cases, hyperbolic discounting does not affect the saving rate dynamics. Numerical simulations employing a generalized class of hyperbolic discounting functions that we term regular discounting functions support the results.

Keywords: Saving rate, non-monotonic transition path, hyperbolic discounting, regular discounting, commitment, short planning horizon, neoclassical growth model

JEL Classification: D91, E21, O40

Suggested Citation

Farzin, Y. Hossein and Wendner, Ronald, Saving Rate Dynamics in the Neoclassical Growth Model – Hyperbolic Discounting and Observational Equivalence (March 25, 2013). Available at SSRN: https://ssrn.com/abstract=2239317 or http://dx.doi.org/10.2139/ssrn.2239317

Y. Hossein Farzin (Contact Author)

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-7610 (Phone)
530-752-5614 (Fax)

HOME PAGE: http://farzin.ucdavis.edu/

Oxford Centre for the Analysis of Resource Rich Economies (OxCarre) ( email )

University of Oxford, Department of Economics
Manor Road
Oxford, OX1 4AU
United Kingdom

HOME PAGE: http://www.oxcarre.ox.ac.uk

Ronald Wendner

University of Graz - Department of Economics ( email )

Universitaetsstrasse 15
RESOWI - F4
Graz, A-8010
Austria
+43 316 380 3458 (Phone)
+43 316 380 693458 (Fax)

HOME PAGE: http://homepage.uni-graz.at/de/ronald.wendner/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
40
Abstract Views
998
PlumX Metrics