OPTIMAL SAVING, INTEREST-RATES, AND ENDOGENOUS GROWTH

The apparent failure of economists thus far to establish a positive em pirical link between interest rates and saving does not, by itself, di scredit the hypothesis of a direct structural relationship between the two, ceteris paribus. This structural relationship may be shifting ab out in response to changes in exogenous variables such as tastes and t echnology in a way that is consistent with any type of reduced-form co rrelation between interest rates, and saving in the data. This point i s demonstrated within a simple model of optimal saving, interest rates and economic growth. The different implications of endogenous versus exogenous growth are explored in this context.