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Advisor(s)
Abstract(s)
Using an overlapping generations model, we argue that a decline in the savings rate, such as the one that has been observed in Portugal over the past 30 years, may be motivated by an increase in the discount factor. This is a standard result for macroeconomic models with agents that live for two periods. However, we innovate in proxying empirically the discount factor by a number of items, such as the fertility rate and the marriage rate. A decline in these suggests that people value the present over the future. As such the discount factor increases. As it turns out, both variables are empirically significant in our econometric analysis and have the correct sign. Furthermore, Ricardian Equivalence effects seem to be absent from the savings behavior of Portuguese households, as increases in public debt are met with decreases in savings by households. Government expenditure is not being perceived as levying higher taxes in the future. Finally, we also show that precautionary saving motivated by the increase in the unemployment rate is only relevant for rates below 6,5%. Above this threshold, the decline in savings due to the decline in income is estimated to be the dominant effect, which becomes dramatic when we consider the current rate of nearly 16%. Portuguese households are simply unable to save currently. The empirical implications of our analysis are staggering, as they question the effectiveness of any austerity program that does rely on higher taxes: these are a tantamount to lower savings rate, which in turn increase country default probabilities, as measured in CDS and bond markets.
Description
Keywords
Consumption Savings Fertility Rate Ricardian Equivalence Discount Factor
Pedagogical Context
Citation
OLIVEIRA, Maria Alberta; Santos, Carlos - An overlapping generations model of the savings rate decline: The case of Portugal. In World Business and Social Science Research Conference, Bangkok, Thailand, 24-25 October, 2013. – In BHUIYAN, Mahbubul Hoque (Ed.). - Proceedings of World Business and Social Science Research Conference Bangkok, Australia: World Business Institute Australia, 2013. ISBN: 978-1-922069-33-7. p. 23