This paper quantifies the role of alternative shocks in accounting
for the recent declines in Japanese saving rates and interest rates
and provides some projections about their future course. We consider
four distinct sources of variation in saving rates and real interest
rates: changes in fertility rates, changes in survival rates, changes in
technology and changes in uninsurable labor income risk. The emprical
relevance of these factors is explored using a computable dynamic
OLG model. We find that the combined effects of demographics and
slower total factor productivity growth successfully explain both the
levels and the magnitudes of the declines in the saving rate and the
after-tax real interest rate during the 1990s. Model simulations indicate
that the Japanese savings puzzle is over.
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