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

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  • Y. Hossein Farzin

    (Department of Agricultural and Resource Economics, UC Davis, U.S.A, Oxford Centre for the Analysis of Resource Rich Economies (OxCarre), Department of Economics, University of Oxford, UK)

  • Ronald Wendner

    (Department of Economics, University of Graz, Austria)

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 the cases where 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.

Suggested Citation

  • Y. Hossein Farzin & Ronald Wendner, 2013. "Saving Rate Dynamics in the Neoclassical Growth Model – Hyperbolic Discounting and Observational Equivalence," Working Papers 2013.42, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2013.42
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    References listed on IDEAS

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    More about this item

    Keywords

    Saving Rate; Non-Monotonic Transition Path; Hyperbolic Discounting; Regular Discounting; Commitment; Short Planning Horizon; Neoclassical Growth Model;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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