Growth, demographic structure, and national saving in Taiwan

This paper is concerned with the effects that changes in demographic structure have had on Taiwan's national saving rate, and how coming changes in its age structure -- notably population aging -- will affect the future saving rate. We examine this topic within the framework of the life-cycle hypothesis (LCH). Life-cycle theory is a natural starting place, since it implies that changes in demographic structure can exert potentially large effects on national saving: increases in the number of people who save (presumably those in middle age) relative to those who save little or dissave (the very young and the elderly) will increase the aggregate saving rate. A related implication of the LCH is that changes in the rate of growth of per capita income affect saving: higher rates of economic growth increase the life-time wealth of the young relative to the old, and the effects on saving of higher growth are much the same as the effects of increasing the numbers of young relative to the old. The LCH also delivers a rich set of predictions about interactions between economic growth and the age structure. As is emphasized in the variable rate-of-growth models of Fry and Mason (1982) and Mason (1987, 1988), the effects of changes in age structure on the saving rate will depend on the life-time wealth of individuals in different age groups, something determined by economic growth. These interactions are important for understanding how the Taiwanese saving rate has evolved over time, and how it may change in the future.

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