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Friday, September 14, 2012

Inequality and Savings

This is from Oya Celasun of the IMF:

How Inequality Affects Saving Behavior, by Oya Celasun: ...Recent research has focused on the link between income inequality and growth, but less attention has been paid to the link between inequality and savings. So ... our study looked at which types of households drove the aggregate saving rate down before the crisis and those that drove it up afterwards...
Saving patterns before the crisis ...Our key finding is that that households with consistently lower income growth experienced larger declines in their saving rates and a larger rise in their mortgage debt before the crisis. We also find that these types of households contributed significantly to the overall decline in the saving rate. ...
Our results suggest that households with disappointing income growth attempted to preserve their living standards in the boom years by tapping into their housing equity. Their decisions did not anticipate the impending correction in house prices, the weaker economy, and lower incomes. The easy availability of home equity financing allowed households with low income growth to at least temporarily “keep up with the Joneses”... With the subsequent housing crash, those households already suffering from lowest income growth found themselves more vulnerable, with high levels of debt. ...
Saving patterns after the crisis How did households fare after the crisis? We found that those more dependent on housing wealth and those with higher debt levels on the eve of the crisis indeed raised their savings sharply after the crisis. Yet, as this sharp correction started from very depressed and even negative saving rates, these households have not yet made meaningful progress in reducing debt and repairing their balance sheets. Hence, these households may face grim future consumption prospects.
Taken together, our results do suggest that the lower income growth for segments of the income distribution was linked to the drop in saving rates and growing indebtedness of American families. Moreover, households that entered the crisis with a more precarious wealth situation have made limited progress in rebuilding their net worth ... by actively saving out of their incomes. ...
Unless their incomes and house prices pick up robustly, many households will need sustained levels of higher savings to rebuild wealth, making it less likely for the American consumer to drive U.S. growth.

    Posted by on Friday, September 14, 2012 at 10:20 AM in Economics, Income Distribution, Saving | Permalink  Comments (45)


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