Top incomes and national savings

1 Oct 2008

The relationship between income inequality and national savings is theoretically ambiguous, and past empirical studies have delivered mixed results. The authors of this paper revisit the question using a newly available source of data on inequality: the income share of the richest 10 percent and the richest 1 percent. Combining this with historical data on national savings rates, they are able to investigate the relationship for eleven developed countries over the period 1921-2002. The authors find no consistent relationship between lagged top income shares and current savings rates, and their standard errors are small enough that they are able to reject more than modest effects in either direction. They view this as suggesting that inequality at the top end of the distribution is not a major driver of national savings rates.

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