Propensity to Save, Marginal

BIBLIOGRAPHY

In economics, a marginal propensity to save is the additional savings associated with a change in a factor that determines saving. Since saving is the difference between income and consumption, a marginal propensity to save is related to a marginal propensity to consume in a simple fashion. For example, the marginal propensity to save from household income is one minus the marginal propensity to consume from household income, and the marginal propensity to save from wealth is the negative of the marginal propensity to consume from wealth.

Any analytical result regarding marginal propensities to consume can be readily expressed in terms of marginal propensities to save. For example, in simple Keynesian analysis the autonomous expenditure multiplier is equivalently the inverse of one minus the marginal propensity to consume from income and the inverse of the marginal propensity to save from income.

In policy discussions and proposals, distinctions between national and personal saving should be kept in mind in applications of estimates of the marginal propensity to save and other arguments of the saving or consumption function. Numerous proposals have been offered to increase personal saving in the United States through tax or other fiscal incentives increasing the aftertax rate of return available to households. Discussions of these proposals often involve estimates of the responsiveness of household or personal saving to changes in the rate of interest, which is connected to the marginal propensity to save with respect to the rate of return. What is sometimes not emphasized is that a full analysis of these policies likely requires looking beyond the personal propensity to save with respect to the rate of return. For instance, such policies would likely increase after-tax personal income, and the marginal propensity of personal saving with respect to after-tax personal income is surely positive. This effect would add to saving generated through a positive rate of return propensity, or offset a decline in saving generated through a negative rate of return propensity. However, these policies (unless negated by other changes), will also increase government outlays or reduce tax revenue, thus reducing government saving. Hence, the effect on national saving of these policies would be problematic even if personal saving increased.

In sum, knowledge of the marginal propensity of personal saving with respect to the rate of return does not provide complete information about the effect on national saving of policies of this type. If the aim of such policies is to encourage saving by certain groups of people, or the policies are financed from tax revenues or cuts in government outlays, analysis of individual household responses would be adequate. But if the aim is to increase national saving and capital formation, and the policies are financed through increased borrowing, broader analysis would appear to be warranted. The parameters of interest will then be marginal propensities of national, not personal, saving with respect to its arguments.

SEE ALSO Economics, Keynesian; Propensity to Consume, Marginal

BIBLIOGRAPHY

Steindel, Charles. 1981. The Determinants of Private Saving. In Public Policy and Capital Formation. Washington, DC: Board of Governors of the Federal Reserve System.

Charles Steindel

Any comments or statements in this entry represent the views of the author only and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.