Does income inequality raise aggregate saving?

This paper reviews analytically and empirically the links between income di stribution and aggregate saving. Consumption theory brings out a number of direct channels through which income inequality can affect overall househol d saving - positively in most cases. However, recent political-economy theo ry points toward indirect, negative effects of inequality - through firm in vestment and public saving - on aggregate saving. On theoretical grounds, t he sign of the saving-inequality link is therefore ambiguous. This paper pr esents new empirical evidence on the relationship between income distributi on and aggregate saving based on a new and improved income distribution dat abase for both industrial and developing countries. The empirical results, using alternative inequality and saving measures and various econometric sp ecifications on both cross-section and panel data, provide no support for t he notion that income inequality has any systematic effect on aggregate sav ing. These findings are consistent with the theoretical ambiguity. (C) 2000 Elsevier Science B.V. All rights reserved.