Supply Of Savings Research Articles

The Demographic Transition and Investment Returns

The transition to an older society, currently underway, should have a significant effect on investment returns. The size of the capital-using working-age population is no longer growing, which lowers the demand for savings. In addition, as the older share of the population rises, so will the supply of savings. Life-cycle models assume that the elderly will draw down the bulk of their savings in retirement. However, empirical studies show that well-to-do elderly, who own the bulk of the wealth of that demographic, do not take such drawdowns. Thus, as more boomers retire, the supply of savings will steadily rise, putting downward pressure on interest and corporate earnings rates. Capital gains boost investment returns, but such gains are one-time affairs; they do not continue forever. Moreover, should the ongoing demographic transition push the Federal Reserve funds rate (needed to maintain full employment) below zero, the result would be a chronically sluggish economy.

Keynesss IS-LM Model Was Not Meant to Be a Toy for Academic Economists to Play With or Perform Their Accustomed Trickss (Hicks)

Hicks’s IS-LM model was a decidedly inferior version of Keynes’s original IS-LP(LM) model, which had been constructed by Keynes in chapters 15 and 21 of the General Theory after he had demonstrated graphically on pp.179-182 of the General Theory that it was mathematically impossible to derive the rate of interest from an IS equation only based on the demand for investment and the supply of savings. Keynes had clearly demonstrated that, just as there was a 2-equation missing from Pigou’s 1933 model in The Theory of Unemployment, there was also an equation missing that had not been specified by the neoclassical theory of the rate of interest. That missing equation was Keynes’s LP(LM) equation presented on Page 199 of the General Theory. Keynes’s major reason for writing the General Theory was to specify his IS-LP(LM), model. However, underlying his IS-LP(LM) macro model was another model that contained Keynes’s supporting microeconomic foundations in the theory of the firm in which Keynes had incorporated uncertain expectations about prices and profits in a carefully developed mathematical analysis provided in chapters 20 and 21 of the General Theory. Keynes called this foundation his D-Z model of expected aggregate supply and expected aggregate demand. From the D-Z model’s set of possible and probable outcomes, only one actual realized result could occur. This result, derived from the Aggregate Supply Curve(ASC), which was a locus or set of all of the possible D-Z combinations, would provide the one Y value of Effective Demand that would be incorporated into the IS-LP(LM) model. Keynes’s IS-LP(LM) model incorporated price expectations. Prices were not fixed. The set of different expected prices was dealt with in the supporting D-Z model’s ASC by means of changing expectations. Hicks’s inferior version of IS-LM removed the anchor of Keynes’s expected aggregate demand and supply analysis that had been provided in chapters 20 and 21 that supplied the foundation that incorporated an analysis of expectations. Keynes’s ASC specified a set of multiple equilibria that incorporated uncertainty about what the actual level of effective demand, Y, would be. Thus, Hicks, in direct contradiction with the conclusions stated in his June 1936 review in the Economic Journal, eliminated both expectations and uncertainty from Keynes’s theory. However, his equation system is correct, as is his elasticity analysis of both LM (Keynes’s LP) and IS. Keynes and Knight are united in their understanding that assessments of probability in the real world are made based on weak evidence, whereas the 3-mathematical theory of probability advocated by Ramsey, Savage, and de Finetti in SEU theory requires strong evidence. This means that the probabilities, both Keynes’s “non-numerical “probabilities and Knight’s “estimates” will have to be interval-valued, involving both an upper probability and a lower probability. The probabilities will be indeterminate and/or imprecise, but rarely precise. The Keynes–Knight position is completely different from the Shackle–Robinson Davidson claim that there can never be any relevant evidence about the future so that all such decisions are based on the imaginations, fantasies, and dreams of decision makers.

J M Keynesss 1937 Refutation of the Claim That HickssHansen (and Others) Saved Keynesss General Theory by the Development of the IS-LM Model in His Professor Pigou on Money Wage Rates in Relation to Unemploymentt

The myth or story regarding the creation of the IS-LM model in the economics profession goes something like this. Keynes correctly showed in the General Theory that you could not specify the rate of interest just from the supply of savings and demand for investment schedules alone because this only provided an IS curve. However, Keynes erred in claiming that it was the demand and supply of money that determined the rate of interest. This meant that Keynes was arguing that the LM curve alone determined the rate of interest. Thus, Hicks, Harrod, Meade, Champernowne, Reddaway, etc., saved Keynes from error by combining the IS and LM curves together to provide a consistent and coherent theory of the rate of interest. A more sophisticated version of this myth is that, while Keynes himself did derive and specify the IS-LM model in his student lectures in December, 1933, and included them in the 1934 draft copy of the General Theory, he refused to present this formal model in the General Theory because he was a follower of Marshall’s dictum that required a writer to burn the mathematics after he had used it to confirm the accuracy of the literary analysis. Various additional claims in this version of the myth were that Keynes was an anti-formalist or had an anti-mathematical or anti-quantificationist streak in him that resulted in his not presenting any formal model of his theory in the General Theory. Both of these stories were destroyed by Keynes himself in the draft copy of his 1937 paper, titled “Professor Pigou on money wage rates in relation to unemployment.” The perpetuation of this myth for over 80 years, combined with the perpetuation of the myth of Adam Smith’s Invisible Hand, exposed repeatedly by G. Kennedy, could lead citizens to question whether economics is even a weak or inexact science. Science and myths can never coexist together if a field of study is truly scientific. Keynes originated, created developed, applied and taught the IS-LP(LM) model starting in December, 1933. Sections IV of both chapters 15 and 21 contained Keynes’s theory and applications, as well as astute criticisms of his own theoretical work. The myth that there was no IS-LM model in the GT is an anti- scientific claim that directly conflicts with the scientific claims made by the economics profession. The sooner this myth is put to rest, the better it will be in the long run for all economists.

Keynes Did Not Use Pigou as a Strawman in the General Theory: Pigou Was Trapped by His Marshallian, Partial Equilibrium Approach in His 1933 the Theory of Unemployment

The economics profession’s failure to recognize that Keynes’s IS-LP(LM) model of chapters 15 and 21 of the General Theory, incorporating Uncertainty and Expectations, is the main message of the General Theory, has led to the failure to recognize that Keynes’s critique of Pigou’s partial equilibrium, the Marshallian model of the macroeconomy, as presented in Chapter Two and the Appendix to chapter 19, is not only entirely correct but understated. Keynes recognized Pigou’s treatment as the best that had been produced up to that time by any of the neoclassical economists. However, Pigou could not model any of the interdependencies of the macroeconomy because he had basically been operating with functions with only one, independent variable-the real wage. Pigou had no Liquidity Preference Function (LM function). He had no clearly defined consumption function with an MPC that would allow him to apply the investment multiplier. Pigou’s theory of the rate of interest was that the rate of interest was determined by the neoclassical Demand for investment and supply of savings, exactly what Keynes had shown was impossible on pp.179-182 of the GT and which Keynes described as a “nonsense” theory. At best, Pigou was operating with a poorly specified IS equation alone. Keynes’s Appendix to chapter 19 is actually very straightforward because it demonstrates repeatedly that Pigou’s macro version of his micro model is simply incorrectly specified and allows no accurate calculation of either aggregate output or aggregate income to be made. Keynes does acknowledge Pigou’s microeconomic structure, which he calls ‘concoctions’, as being valuable. Keynes, in fact, improved Pigou’s mathematical modelling in a manner that allowed him to specify and incorporate expectations and uncertainty into his D-Z model that lead to the specification of a set of multiple equilibria, which Keynes called the Aggregate Supply Curve. This model supports the IS-LP(LM) model.

A Study of Some of the Most Severe Misrepresentations of J.M. Keynes's Theory of the Rate of Interest in the General Theory in the Late 1930's

Keynes’s theory of the rate of interest combines the incomplete and partial neoclassical view that the Amount of Savings and Investment determine the interest rate with his own unique contribution based on liquidity preference. Liquidity preference was theoretically based by Keynes on his “weight of the evidence” criterion from the A Treatise on Probability.The demand and supply of money had to be taken into account along with the demand for investment and the supply of savings. Keynes never stated at any time in his life that his theory of the rate of interest was determined by liquidity preference ALONE. Unfortunately, M.Millikan and J. Viner in the late 1930’s failed to cover chapters 15 and 21 of the General Theory. They then published academic papers that would mislead other researchers into believing that Keynes was arguing that the demand and supply of money ALONE determined the rate of interest. The work of Millikan and Viner has probably mislead tens of thousands of economists over the last 80 odd years.Keynes’s very clear and lucid presentation of his four equation, simultaneous, formal, mathematical, determinate model, incorporating uncertainty as a shift paramenter in the GT in Section IV of Chapter 21, was completely overlooked by all reviewers of the GT. Champernowne indirectly made the best evaluation of Keynes’s model in 1936. Hicks’s “interpretation” is an inferior version of Keynes’s original system of equations presented as a system by Keynes in chapters 15 and 21 of the GT. Nonetheless, an economist such as Krugman, working with Hicks’s version can ,in fact, do macroeconomics satisfactorily as long as he has also understood Samuelson’s (and Keynes’s) dissertation position, reiterated in his 1970 Nobel address conclusion, that optimization based, microeconomic models of individual maximizing behavior (Max U and Max π) can’t possibly be used to model macroeconomic behavior incorporating positive feedback effects, such as the multiplier and accelerator, because the macro whole then becomes far greater than the micro parts. It is simply mathematically impossible to represent the multiplier and accelerator impacts as a micro optimization problem based on negative feedback alone. Unfortunately, it is precisely due to a gross ignorance of Samuelson’s position that the IS-LM version of Hicks was pushed aside in the mid 1970’s by Muth, Lucas, Sargeant, etc.over a bogus claim the IS-LM did not have a optimization based foundation in microeconomic optimization theory of the consumer and producer.

Endogenous market structures in the credit market and Ricardian equivalence

We analyze the impact of imperfect competition in banking on fiscal policy in a dynamic model. In an exchange two-period economy the impact of deficit spending is to reduce private consumption and increase the spread between deposit and lending rates. The reason is that a tax cut forces consumers to save more and makes their supply of savings more rigid, which softens competition between banks leading to lower rates on deposits and a more than proportional increase in savings. In a closed production economy this reduces the equilibrium interest rate on borrowers, which promotes private investment.

The Impact of Projected Demographic Developments on Funded Pension Provision in Austria

The following study analyzes the impact of demographic developments in Austria on funded pension provision in Austria. It does so by integrating demographic developments in to a standard growth model, linking the results to the accumulation and annuitisation of funded pensions. Furthermore, the simulations introduce the possibility of the international diversification of investments and consumption as well as the integration of real capital markets. The simple structure of the model allows us to conduct a number of sensitivity analyses. Furthermore, it helps to identify the the underlying interactions at work in obtaining the overall results. The key results of this study are the following: (1) Households' net supply of savings and the demand for capital by the corporate sector (net investment) both need to be integrated into the empirical and theoretical analysis of the impact of demographic developments on financial markets. Considering the relative supply and demand for financial assets within the household sector (as is done in the asset meltdown literature) is not the adequate conceptual framework. (2) Funded pension provision is exposed to two demographic risks: decreasing birth rates and increasing longevity. On the one hand, lower expected growth rates of the input labour are expected to exert downward pressure on long-term real interest rates and future pension income. Increasing longevity further reduces future pension income. (3) On the other hand, decreasing future net savings relative to net investment partly exert upward pressure on the long-term real interest rates. The net impact is evaluated based on a simulation exercise. (4) In public discourse, the superiority of funded pension provision is argued on the basis of demographic change, which is supposed to make public pension provision unsustainable. The model and the simulations in this paper highlight the impact of demographic change on funded pensions and its dynamics as well as quantify the order of magnitude of this impact. The negative impact of demographic change on funded pension provision is non-negligible.

The normative and positive aspects of the taxation of imputed rent on owner-occupied housing

Received July 1983, revised version received March 1984 1. Introduction This paper is concerned with two basic issues associated with the special income tax treatment of owner-occupied housing. The first is the effect of this policy on resource allocation and, in particular, on the rate of productive capital accumulation (i.e. capital accumulation which contributes to the increase of the marginal and average product of labor), the rate of total capital accumulation (productive and residential capital), and consequently on the interest rate and the wage rate. The second is whether this policy can or cannot be consistent with some notions of optimality. The income tax treatment of owner-occupied housing is considered in the existing literature to be discriminatory in favoring this type of capital accumulation versus rental housing and productive capital. Such a discrimin- ation is believed to attract resources from the rental-housing and productive capital to owner-occupied housing and thus to distort resource allocation. However, the literature is mainly concerned with the impact of the preferen- tial treatment of owner-occupied housing on income distribution, the total loss of welfare and the owner-occupied versus the rental market shares [see, for example, Laidler (1969), Shelton (1970), Aaron (1970), White and White (1977), Weiss (1978), Rosen (1979), and Henderson and Ioannides (1983)]. The long-run impact of this policy on the allocation of resources between housing and productive capital and on the total supply of capital are only casually analyzed. For example, although Aaron (1970) recognizes the possibility that the tax benefits to homeowners may affect the total supply of savings, in his main analysis he assumes that this supply is unaffected by this *Financial assistance from the Foerder Institute for Economic Research is gratafully acknowledged.

Exports and the Propensity to Save

may be constrained by the maximum available supply of savings. Foreign aid supplements this and enables a faster pace of economic development. Second, in the initial stages of development an underdeveloped country may require several goods of strategic importance that it is unable to manufacture domestically because either skills or raw materials are lacking. In addition, the export earnings may not be adequate to purchase such goods from abroad. Lack of foreign exchange, therefore, slows up the economic development process. In this context foreign aid overcomes the import constraint. It has been suggested that the development process can be accelerated when the foreign-exchange constraint is removed, compared with the savings constraint. A major assumption of Chenery's model is that the ex ante savings gap and the foreign-exchange gaps are independent of one another. This assumption has been the subject of critical analysis. It has been argued that the balance-of-payments problem cannot be treated in isolation from the savings-investment problem. Alfred Maizels has argued that variations in exports might result in associated variations in domestic savings.2 Should this be correct, the two-gap * I am indebted to Professor David Felix for his encouragement in exploring the main hypothesis of this paper. He is not responsible for any errors in the analysis. I am thankful to two anonymous referees of this journal for helpful comments on an earlier draft of this paper. I am also thankful to Ling Ling Chang for help with the computer work.

L'offre de crédit

The supply of loanable funds What are the factors which determine the supply of loanable funds ? In what respects does the latter differ from the supply of savings ? The supply of funds depends not only on the volume of saving but also upon the extent to which savings are mobilized and the successive links between credits granted and received. These two factors are decisive for a divergence between the supply of saving and the supply of loanable funds. This conclusion does not imply abandoning the real factors of saving and investment in the classical concept of the supply of loanable funds. But it is necessary to consider the ways in which savings are transformed in order to become négociable. It follows that the rate of interest can be conceived of as the price of credit although changes in the volume of credit need not be accompanied by interest changes.