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A Paradox of Thrift in General Equilibrium Without Forward Markets

Author

Listed:
  • Christophe Chamley

    (PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, BU - Boston University [Boston])

Abstract

After 2008, the US personal saving rate had its strongest postwar jump, from 2% to 5%, and the investment ratio its sharpest fall from its postwar average of 16% to its lowest level of 12%. The coordination of saving and investment is analyzed here in a theoretical model of general equilibrium with rational expectations and no forward market. Shocks affect preferences for future consumption. A paradox of thrift is proven that formalizes an argument in the General Theory of Keynes but the equilibrium is a constrained Pareto optimum. Textbook fiscal policies are neutral at best, or inefficient.

Suggested Citation

  • Christophe Chamley, 2012. "A Paradox of Thrift in General Equilibrium Without Forward Markets," PSE-Ecole d'économie de Paris (Postprint) halshs-00754571, HAL.
    • Handle: RePEc:hal:pseptp:halshs-00754571
    DOI: 10.1111/j.1542-4774.2012.01097.x
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    Citations

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    Cited by:

    1. Bernardo Guimaraes & Caio Machado & Marcel Ribeiro, 2016. "A Model of the Confidence Channel of Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(7), pages 1363-1395, October.
    2. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    3. Monnet, Eric & Degorce, Victor, 2020. "The Great Depression as a Saving Glut," CEPR Discussion Papers 15287, C.E.P.R. Discussion Papers.

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