Ando, Albert, and Franco Modigliani, “The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests,” American Economic Review Vol. 53 (March 1963), pp. 55-84.
Auerbach, Alan and Laurence Kotlikoff (1983), “An Examination of Empirical Tests of Social Security and Savings,” in E. Helpman (ed.) Social Policy Evaluation: An Economic Perspective, Academic Press, New York, pp. 161-179.
Barro, Robert J. (1974), “Are Government Bonds Net Wealth?”, Journal of Political Economy”, Vol. 82 (November/December 1974), pp. 1095-1117.
Barro, Robert J. (1978), The Impact of Social Security on Private Saving: Evidence from the U.S. Time Series, American Enterprise Institute for Public Policy Research, AEI Studies No. 199, Washington 1978.
Barth, J., G. Iden and F. Russek (1984/85), “Do Federal Deficits Really Matter?”, Contemporary Policy Issues, Fall 1984/85, pp. 79-95.
Bernheim, Douglas (1987), “Ricardian Equivalence: An Evaluation of Theory and Evidence”, S. Fischer (ed.) NBER Macroeconomics Annual 1987, pp. 263-304.
Bernheim, Douglas, and Kyle Bagwell (1988). “Is Everything Neutral?” Journal of Political Economy, Vol. 96, No. 2 (April 1988), pp. 308-338.
Boskin, Michael (1988), “Consumption, Saving and Fiscal Policy”, American Economic Association Papers and Proceedings, Vol. 78, No. 2 (May 1988), pp. 401-407.
Boskin, Michael, and Laurence Kotlikoff (1985), “Public Debt and U.S. Saving: A New Text of the Neutrality Hypothesis”, in Karl Brunner and Alan Meltzer (eds.) Carnegie Rochester Conference Series on Public Policy: The “New Monetary Economics,” Fiscal Issues and Unemployment, Summer 1985, Vol. 23, pp. 55-86.
- Search Google Scholar
- Export Citation
)| false ( Boskin, Michael, and Laurence Kotlikoff 1985), “ Public Debt and U.S. Saving: A New Text of the Neutrality Hypothesis”, in ( Karl Brunnerand Alan Meltzer eds.) Carnegie Rochester Conference Series on Public Policy: The “New Monetary Economics,” Fiscal Issues and Unemployment, Summer 1985, Vol. 23, pp. 55- 86.
Buiter, Willem, and James Tobin (1979), “Debt Neutrality: A Brief of Theory and Evidence”, in G. von Furstenberg (ed.) Social Security Versus Private Saving, (Ballinger, Cambridge, Mass., 1979).
Darby, Michael (1975), “Postwar U.S. Consumption, Consumer Expenditures and Saving”, American Economic Review, Vol. 65 (May 1975), pp. 217-222.
Darby, Michael (1978), “The Consumer Expenditure Function”, Explorations in Economic Research, 4 (Winter 1977/Spring 1978), pp. 645-674.
Darby, Michael, Robert Gillingham and John Greenlees (1987), “The Impact of Government Deficits on Personal and National Saving Rates”, Research Paper 8702, U.S. Department of the Treasury, Office of the Assistant Secretary, Economic Policy.
Davies, James (1981), “Uncertain Lifetimes, Consumption and Dissaving in Retirement”, Journal of Political Economy, Vol. 89, (June 1981), pp. 561-577.
Evans, Owen (1983a), “Tax Policy, the Interest Elasticity of Saving and Capital Accumulation: Numerical Analysis of Theoretical Models”, American Economic Review, Vol. 73 (June 1983), pp. 398-410.
Evans, Owen (1983b), “Social Security and Household Savings in the United States: A Re-examination”, Staff Papers, Vol. 30, No. 3, (September 1983), pp. 601-618.
Evans, Owen (1988) “Macroeconomic Implications of the Decline in Equity Prices in October 1987” (unpublished, International Monetary Fund, July 1988).
Feldstein, Martin S. (1974), “Social Security, Induced Retirement and Aggregate Capital Accumulation”, Journal of Political Economy, Vol. 82 (Sep./Oct. 1974), pp. 905-926.
Feldstein, Martin S. (1977), “Social Security and Private Savings: International Evidence in an Extended Life Cycle Model”, in M. Feldstein and R. Inman (eds.), The Economics of Public Services: Proceedings of a Conference Hotel by the International Economic Association in Turin, Italy, (London, 1977), pp. 174-205.
- Search Google Scholar
- Export Citation
)| false ( Feldstein, Martin S. 1977), “ Social Security and Private Savings: International Evidence in an Extended Life Cycle Model”, in ( M. Feldsteinand R. Inman eds.), The Economics of Public Services: Proceedings of a Conference Hotel by the International Economic Association in Turin, Italy, ( London, 1977), pp. 174- 205.
Feldstein, Martin S. (1982a), “Social Security and Private Saving: Reply”, Journal of Political Economy, Vol. 90 (June 1982), pp. 630-642.
Hall, Robert, and Frederick Mishkin (1982), “The Sensitivity of Consumption to Transitory Income: Evidence from Panel Data on Households”, Econometrica, Vol. 50, (March 1982), pp. 461-481.
Hayashi, Fumio (1982), “The Permanent Income Hypothesis: Estimation and Testing with Instrumental Variables”, Journal of Political Economy, Vol. 90, (October 1982), pp. 895-916.
Hernandez-Cata, Ernesto, “The Impact of Fiscal Variables on Personal Consumption: an Interpretation of the Empirical Evidence”, (unpublished, International Monetary Fund, 1982).
Hubbard, Glenn, and Kenneth Judd (1986), “Liquidity Constraints, Fiscal Policy and Consumption”, Brookings Papers on Economic Activity, 1986:1, pp. 1-50.
International Monetary Fund, World Economic Outlook: Revised Projections by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington, D.C., October 1988).
Kormendi, Roger (1983), “Government Debt, Government Spending and Private Sector Behavior”, American Economic Review, Vol. 73 (December 1983), pp. 994-1010.
Kormendi, Roger, and Philip Meguire (1986), “Government Debt, Government Spending and Private Sector Behavior: Reply,” American Economic Review, Vol. 76, No. 5 (December 1986) pp. 1180-1187.
Kotlikoff, Laurence (1988), “Intergenerational Transfers and Savings”, Journal of Economic Perspectives, Vol. 2, No. 2 (Spring 1988), pp. 41-58.
Kotlikoff, Laurence, and Avia Spivak (1981), “The Family as an Incomplete Annuities Market”, Journal of Political Economy, Vol. 89, No. 2 (April 1981), pp. 372-391.
Kotlikoff, Laurence and Lawrence Summers (1981), “The Role of Intergenerational Transfers in Aggregate Capital Accumulation”, Journal of Political Economy, Vol. 89, No. 4 (August 1981), pp. 706-732.
Leiderman, Leonardo and Mario Blejer (1988), “Modelling and Testing Ricardian Equivalence”, Staff Papers, Vol. 35, No. 1 (March 1988), pp. 1-35.
Leimer, Dean, and Selig Lesnoy (1982), “Social Security and Private Saving: New Time Series Evidence”, Journal of Political Economy, Vol. 90 (June 1932), pp. 606-629.
Mariger, Randall (1986), Consumption Behavior and the Effects of Government Fiscal Policy, (Harvard University Press, Cambridge, Massachusetts, 1986).
Meyer, Laurence H. and Associates (1988), The Washington University Macro Model Book, Laurence H. Meyer and Associates Ltd., St. Louis, Missouri.
Modigliani, Franco (1984), “The Contribution of Intergenerational Transfers to Total Wealth”, paper presented to the Paris Conference on Modelling the Accumulation and Distribution of Wealth (September 1984).
Modigliani, Franco (1988), “The Role of Intergenerational Transfers and Life Cycle Saving in the Accumulation of Wealth”, Journal of Economic Perspectives, Vol. 2, No. 2 (Spring 1988), pp. 15-40.
Modigliani, Franco, and Brumberg, Richard (1955), “Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data”, in K. Kurihara (ed.), Post-Keynesian Economics (Allen and Unwin, London, 1955).
Modigliani, Franco, and Arlie Sterling (1986), “Government Debt, Government Spending and Private Sector Behavior: Comment”, American Economic Review, Vol. 76, No. 5 (December 1986), pp. 1168-1179.
Pollak, Robert (1988), “Tied Transfers and Paternalistic Preferences”, American Economic Association Papers and Proceedings, Vol. 78, No. 2 (May 1988), pp. 240-244.
Seater, John, and Roberto Mariano (1985), “New Tests of the Life Cycle and Tax Discounting Hypothesis”, Journal of Monetary Economics, Vol. 15 (1985), pp. 196-215.
The authors are grateful to S. T. Beza, Lans Bovenberg, David Coe, Yusuke Horiguchi and other colleagues in North American Division for helpful comments on various earlier drafts, and to Mrs. F. Pham for excellent research assistance. The authors alone are responsible for the opinions expressed and any remaining errors.
Technically, each individual incorporates the utility of successor generations as arguments in his utility function so that in effect each individual can be viewed as infinitely lived.
In reality, lump-sum taxation does not exist. The question therefore arises as to whether the results just stated would be substantially altered by recognizing the distortionary effects of taxation. The impact of distortionary taxation on aggregate saving would depend on how that taxation affected the rate of return to saving․i.e., the (net of tax) real rate of interest․and, to the extent that the rate of return is affected, on how aggregate saving responds to such changes. Concentrating on the latter factor․the former factor concerns the incidence of taxation․the consensus seems to be that the interest elasticity of aggregate savings is quite low. In reality also, changes in taxation have effects on labor supply which could have consequences for private saving. For prime age males at least, the effects of tax changes on labor supply are typically judged to be small.
The largest transfer program, social security, has its own dedicated source of finance in the form of social security taxes. However, this does not affect the analysis since it is clearly possible to alter benefits without altering taxes.
It is conceivable that, when the expectational effects have worked through, savings could increase by more than the reduction in benefits implying that national savings could increase by significantly more than the reduction in the deficit.
In fact, it has been implicitly assumed throughout the analysis to this point that none of the fiscal measures would result in aggregate demand effects. To use the language of public finance, the analysis here is in the spirit of a budget incidence approach in that it is being assumed that the fiscal measures result in movements along the production possibility frontier rather than in shifts of that frontier, or in deviations of actual production away from that frontier. For a further elaboration, see Musgrave and Musgrave (1976). Note that by taking this approach, the paper abstracts from balanced-budget multipliers (a traditional form of analysis of the differential impact of tax and expenditure changes) in examining the response of private consumption and saving to government fiscal measures.
Depending on the particular study, C may be defined as total consumer expenditure or as pure consumption. The latter comprises expenditures on nondurable goods and services plus the estimated service stream on the stock of consumer durables.
Depending on the particular study, they may or may not be deflated by population.
Among the influential studies failing to find support for Ricardian equivalence are the following: Feldstein (1982b); Barth, Iden, and Russek (1984-85); Hernández-Catá (1982); Modigliani and Sterling (1986). Empirical studies in this vein lending support to Ricardian equivalence include those of Seater and Mariano (1985), Kormendi (1983), and Kormendi and Meguire (1986).
Notation is as follows: C = consumer spending; YP = permanent income; YT = transitory income; CD = the stock of consumer durables; M1 = the M1 definition of the money supply; PD = the implicit deflator for consumer durable goods; PND = the implicit deflator for other consumer goods; r = the AAA corporate bond rate; GD = the general government deficit, with a distributed lag over four periods.
The “traditional” income variable (Y1 in Table 1) is defined to be net national product, plus general government spending (excluding that on goods and services) less general government revenue. The Ricardian income measure (Y2 in Table 1) is defined to be net national product less general government spending on goods and services. Each is then separated into permanent and transitory components.
In 1986, the traditional permanent income measure was 3 percent higher than the corresponding actual income, while the Ricardian measure of permanent income was 7 percent above actual income.
In a sense, the argument that household consumption was high relative to income (and saving rates correspondingly were low) because permanent income was substantially in excess of actual income is close to being a tautology when the data for permanent income are generated to maximize the fit of a consumption equation.
If equation (2) is estimated with the “traditional” income variable, then a $1 reduction in government spending will in the long run increase consumer spending and lower household savings by a7 dollars where a7 is the sum of the coefficients on the government deficit terms․expected to be negative. An increase in taxation by a dollar, however, will reduce consumer spending in the long run by (a1 + a7) dollars․that is, the sum of the coefficients on permanent income and the government deficit. Household saving will then be reduced by 1- (a1 + a7) dollars. When the equation is estimated with the Ricardian income variable, DGG suggest that a reduction in government spending will raise that measure of income while lowering the deficit, with a long-run impact on consumer spending of (a1 - a7) dollars per dollar of cuts; household saving is thus changed by (1 - a1 + a7) dollars. An increase in taxation by a dollar has no effect on Ricardian income, and eventually reduces consumer spending by a7 dollars, and household saving by 1 - a7 dollars.
Equation (1) includes only current and lagged household disposable income, while equation (2) includes net national product less net taxes, and equation (3) enters separately disposable income and the difference between net national product less net taxes, and disposable income.
An examination of the definitions of Y1 (traditional income) and Y2 (Ricardian income) reveals that Y2 = Y1 - DEF, where DEF is the general government deficit. Consequently an equation
C = a1 Y2 + a2 DEF + a3 Z,
where Z is a vector of other explanatory variables, is a simple linear transformation of the equation
C = b1Y1 + b2 DEF + b3 Z.
With regard to the estimated coefficients, it will be the case that
b1 = a1; b2 = a2 - a1 and b3 = a3.
The dependent variable C is pure consumption (consumer expenditures on nondurable goods and services, plus the imputed income on and service stream from the stock of household consumer durables), as defined in the Federal Reserve MPS econometric model. All variables other than government spending are deflated by the deflator for pure consumption and by population; the deflation of G․a subject of controversy in this literature․is dealt with in the footnotes to the table presenting results. Notation is as follows: C = pure consumption; Y = net national product; W = household wealth, excluding government debt; G = government spending on goods and services; T = government revenues; TF = government transfers to persons; D = government debt to households.
Assuming that tax changes are viewed as permanent, in the sense that they are not expected to be reversed within the current generation’s lifetime.
The appropriate sign of the coefficients on government spending is not clear, a priori, since it depends on whether that spending substitutes for or is complementary with private spending. Military spending was separated in equation (3) to test the validity of the view that its substitutability/complementarity characteristics might be distinct from those of non-military spending.
Developed and maintained by Laurence H. Meyer and Associates. See Laurence H. Meyer and Associates (1988).
The ex ante fiscal cuts amounted to 0.42 percent of baseline GNP in 1988, declining to 0.34 percent of baseline GNP by 1996, the terminal year.