THE PRODUCTIVITY SLOWDOWN AND THE SAVINGS SHORTFALL: A CHALLENGE TO THE PERMANENT INCOME HYPOTHESIS

I argue that the saving decline following the post-1973 productivity slowdown discredits the permanent income hypothesis. The permanent income hypothesis predicts that a reduction in expected future income growth should cause an increase in saving. I show that economic agents revised downward their expectations of future growth after 1973 but that the saving rate declined. other economic events during this period cannot explain this discrepancy.