Reexamine the u.s. household saving

During the past several decades the household saving rate in the US has undergone significant changes; it was as high as 12% in early 1980s and then gradually dropped to less than 3% in the middle of 2000s. Although there is a reversal of declining trend after the financial crisis in 2008, the household saving rate is much lower than its overall average since 1980s. The downward trend in household savings can be troublesome for two reasons. First, national saving (of which private saving - business and household - is a component) has been insufficient to support domestic investment. Investment fuels growth in output and wages, leading to a higher standard of living. The saving investment gap has resulted in an increasing dependence on foreigners’ willingness to finance US investment. Second, household saving may be inadequate to support retirement of a substantial proportion of the population. Social Security, as it exists, will not be able to fill the gap.  The main objective of this paper is to identify the main macroeconomic variables that may help explain the fluctuations in household saving. A dynamic time series model is applied to examine all the potential candidate variables that may contribute to aggregate household saving. These macro-determinants include households’ sensitivity to the economic environment, demographical change, net wealth to disposable income ratio, real interest rate, productivity, and the public saving rate. Depending on the time horizon, the empirical results indicate that these macro-determinants have different impacts on the household saving. An out-of-sample saving rate forecast based on the empirical model is also applied to examine the model fit. The result supports the importance and contribution of these macro-determinants to the aggregate household saving behavior.