Saving and Growth Under Borrowing Constraints Explaining the 'High Saving Rate' Puzzle

This paper shows that uninsured risk and borrowing constraints can make an individual's marginal propensity to consume negatively dependent on his/her permanent income. Therefore, higher income growth can lead to higher saving rates without requiring (or causing) high interest rates – in sharp contrast to implications of the permanent income hypothesis. For example, the model predicts that household saving ratio can rise from 5% to 25% when the annual rate of income growth increases from 1% to 10%, despite a fixed 1% real deposit rate. The predictions are consistent with the experience of emerging economies, such as Japan (in the 1950-70s) and China (over the past 30 years)