![]() ![]() These policies are often known as savings incentives in the West, where it is felt that the prevailing savings rate is "too low" (below the Golden Rule rate), and consumption incentives in countries like Japan where demand is widely considered to be too weak because the savings rate is "too high" (above the Golden Rule). Consumption taxes, for example, may reduce the level of consumption and increase the savings rate, whereas capital gains taxes may reduce the savings rate. Various economic policies can have an effect on the savings rate and, given data about whether an economy is saving too much or too little, can in turn be used to approach the Golden Rule level of savings. Let k be the capital/ labour ratio (i.e., capital per capita), y be the resulting per capita output ( y = f ( k ). The following arguments are presented more completely in Chapter 1 of Barro and Sala-i-Martin and in texts such as Abel et al. Put another way, the golden-rule capital stock relates to the highest level of permanent consumption which can be sustained.ĭerivation of the golden-rule savings rate Somewhere in between is the "Golden Rule" level of savings, where the savings propensity is such that per-capita consumption is at its maximum possible constant value. This makes a steady state unsustainable except at zero output, which again implies a consumption level of zero. A savings rate of 0% implies that no new investment capital is being created, so that the capital stock depreciates without replacement. In the Solow growth model, a steady state savings rate of 100% implies that all income is going to investment capital for future production, implying a steady state consumption level of zero. Although the concept can be found earlier in the work of John von Neumann and Maurice Allais, the term is generally attributed to Edmund Phelps who wrote in 1961 that the golden rule "do unto others as you would have them do unto you" could be applied inter-generationally inside the model to arrive at some form of " optimum", or put simply "do unto future generations as we hope previous generations did unto us." In economics, the Golden Rule savings rate is the rate of savings which maximizes steady state level of the growth of consumption, as for example in the Solow–Swan model. Rate of savings which maximizes steady state level of the growth of consumption ![]()
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