A Paradox of Thrift in General Equilibrium Without Forward Markets

Journal article: After 2008, the US personal saving rate had its strongest postwar jump, from 2% to 5%, and the investment ratio its sharpest fall from its postwar average of 16% to its lowest level of 12%. The coordination of saving and investment is analyzed here in a theoretical model of general equilibrium with rational expectations and no forward market. Shocks affect preferences for future consumption. A paradox of thrift is proven that formalizes an argument in the General Theory of Keynes but the equilibrium is a constrained Pareto optimum. Textbook fiscal policies are neutral at best, or inefficient.

Author(s)

Christophe Chamley

Journal
  • Journal of the European Economic Association
Date of publication
  • 2012
Keywords JEL
E12 E21
Keywords
  • Paradox of thrift
  • Coordination
  • Incomplete markets
Pages
  • 1015-1035
Version
  • 1
Volume
  • 10