SHIFTS IN US SAVINGS - LONG-RUN ASSET ACCUMULATION VERSUS CONSUMPTIONSMOOTHING

Recently, savings rates have fluctuated considerably in the USA. The i mplications of these movements have interested both policy makers and economists. This paper considers two reasons why savings may change: ( i) a change in the economy's desired long-run capital stock, and (ii) the economy's desire to smooth its consumption through time. To identi fy both kinds of movements in US savings, the permanent income hypothe sis (PIH) is modified to incorporate discrete breaks. Evidence suggest s that discrete breaks in saving occurred during 1972-74 and again dur ing the mid1980s. And, when breaks are accounted for, it is found that rises (falls) in saving anticipate falls (rises) in output, suggestin g that people use savings to help smooth consumption over time, consis tent with the PIH.