Shifts in US savings: long-run asset accumulation versus consumption smoothing

Recently, savings rates have fluctuated considerably in the USA. The implications of these movements have interested both policy makers and economists. This paper considers two reasons why savings may change: (i) a change in the economy's desired long-run capital stock, and (ii) the economy's desire to smooth its consumption through time. To identify both kinds of movements in US savings, the permanent income hypothesis (PIH) is modified to incorporate discrete breaks. Evidence suggests that discrete breaks in saving occurred during 1972-74 and again during the mid 1980s. And, when breaks are accounted for, it is found that rises (falls) in saving anticipate falls (rises) in output, suggesting that people use savings to help smooth consumption over time, consistent with the PIH.