This chapter assesses the prospects for U.S. personal saving in light of the sharp contraction of consumer spending during the financial crisis. Using two alternative econometric approaches, the paper finds that the saving rate may increase somewhat from current levels to about 4¾–5½ percent of disposable income in the medium term.
Appendix 1. State-Space Model For Saving Rate and Wealth
In this specification, the saving rate depends on the deviation of household wealth from its (unobserved) target m-m*, credit conditions CC (approximated by banks’ willingness to extend consumer credit), and real interest rate r:
Consistent with the precautionary saving literature, the unobserved target wealth is modeled as a function of uncertainty δσ (measured by the Bloom’s index6) and real interest rates:
It is assumed that the gap between actual and target wealth can be highly persistent:
Realistically, the measured variables track the “true” underlying uncertainty and expected real interest rates (denoted by stars) only imperfectly:
The resulting state-space system is estimated using the U.S. quarterly data during 1966–2009. The estimated coefficients are reported in the table below. Figure on the next page plots the estimated path for target household wealth.
State-Space Model: Coefficient Estimates
International Monetary Fund, 2008, “The Changing Housing Cycle and The Implications for Monetary Policy”, Chapter 3 of World Economic Outlook (Washington, D.C.)
Lee, Jaewoo, Pau Rabanal, and Damiano Sandri, 2010, “U.S. Consumption after the 2008 Crisis”, IMF Staff Position Note 10/01, January (Washington, D.C.).
Prepared by Martin Sommer with contributions from Jirka Slacalek.
In addition, the Nordic economies continued to be pummeled by external shocks (economic transition in the CEECs, exchange rate volatility), their inflexible economies went through a period of labor and product market liberalization, and domestic asset prices fell for at least 4 consecutive years.
The sample consists of the G-7 data over 1985–2007 (2009 for the United States).
The unemployment rate is projected at close to 5 percent in both years.