Tim Miller > Curriculum Vitae > Abstract Page

by Ronald Lee, Andrew Mason, and Timothy Miller

In this paper, we simulate the effect of the demographic transition on saving rates and the demand for capital if all savings were for the purpose of spreading consumption smoothly over the life cycle, and if there were no transfers for this purpose other than to children. We assume that people correctly foresee all demographic change, but that expectations about future rates of interest and productivity growth are based on recent experience, using an adhoc procedure, and that these expectactions are typically incorrect. Actual interest rates and productivity growth are treated as exogenous, and are unaffected by savings behavior or demographic change.

We find that under the assumption of pure life cycle saving, aggregate saving rates would decline modestly during early stages of the transition, then rise quite substantially during a long middle period, and then decline again as the population ages rapidly in the last stage of the transition. Our simulated age patterns of income, consumption, and savings rates for Taiwan agree in som respects, but not all, with aggregate savings data and with survey data from Taiwan. Comparisons with other approaches show general qualitative agreement that the demographic transition should boost savings rates for a number of decades, but disagreement about the magnitude of this effect. We believe that our results are of general relevance for countries passing through the demographic transition, provided that life cycle saving, and the financial institutions necessary to sustain it, are present at least in the later stages of the transition.

Population and Development Review, forthcoming.

• The working paper on which this article is based is available in pdf format.