Dynamic Effects of a Shift in Savings; The Role of Firms

Abstract

POLICIES DESIGNED TO INCREASE CAPITAL ACCUMULATION through an increase in the savings rate are being currently considered in the United States. Suppose that fiscal measures are implemented which increase the savings rate; what will the dynamic effects on output and capital accumulation be? The literature provides us with two well-known but partly conflicting answers. The first, addressed to the short and medium run, emphasizes aggregate demand effects and the possible paradox of savings: an increase in the savings rate will decrease aggregate demand and may well decrease both savings and investment. The second, addressed to the long run, emphasizes that larger savings imply a higher sustainable capital stock in steady state. Are the two answers somehow consistent? Is it plausible in particular that rational firms would initially decumulate capital only to accumulate more later, that rational agents would initially save less only to save more later? To study these questions, a model must have three components. As, at any point of time, equilibrium is characterized by the equality of savings and investment, it must have a description of savings behavior by agents and of investment behavior by firms. To allow for aggregate demand effects on production, it must also allow for some price and wage inflexibility and thus give a description of price and wage behavior. The choice of the paper is to focus on one of the three components, namely the investment behavior of firms and, to keep the analysis tractable, to make the other two components as simplesimplistic-as possible. (Malinvaud [9], in studying the same issue, chooses a simpler description of investment and a more refined description of the wage-price mechanism.) Section 1 characterizes the investment decision of firms in partial equilibrium. Section 2 embeds it in a macroeconomic model. Sections 3 to 5 characterize the dynamic adjustment under various degrees of price and wage rigidity.