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| In [[economics]], the '''Golden Rule savings rate''' is the rate of [[savings]] which maximizes steady state level or growth of consumption,<ref>{{cite book | last = Phelps| first = Edmund
| | 20 year old Master Fisher Avery from Barwick, loves to spend some time kites, property developers [http://demo.ugcgaming.us/profile/NicolePalo new condos in singapore] singapore and stamp collecting. Intends to retire and take the family to lots of the great heritage listed places on earth including Ruins of Loropéni. |
| | title = Golden rules of economic growth
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| | publisher = [[W. W. Norton & Company|Norton]]
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| | location = New York
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| | year = 1966}}
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| </ref> as for example in the [[Solow growth model]]. Although the concept can be found earlier in [[John von Neumann]] and [[Maurice Allais]]'s works, the term is generally attributed to [[Edmund Phelps]] who wrote in 1961 that the [[Golden Rule (ethics)|Golden Rule]] "do unto others as you would have them do unto you" could be applied inter-generationally inside the model to arrive at some form of "[[Optimization (mathematics)|optimum]]", or put simply "do unto future generations as we hope previous generations did unto us."<ref name="PhelpsAttribution">[http://www.newschool.edu/nssr/het/essays/growth/optimal/goldengr.htm Origin of the term described at newschool.edu]</ref>
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| In the Solow growth model, a steady state savings rate of 100% implies that all income is going to investment [[capital (economics)|capital]] for future production, implying a steady state consumption level of zero. A savings rate of 0% implies that no new investment capital is being created, so that the capital stock depreciates without replacement. This makes a steady state unsustainable except at zero output, which again implies a consumption level of zero. Somewhere in between is the "Golden Rule" level of savings, where the savings propensity is such that per-capita [[consumption (economics)|consumption]] is at its maximum possible constant value. Put another way, the golden-rule capital stock relates to the highest level of permanent consumption which can be sustained.
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| == Derivation of the Golden Rule savings rate ==
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| The following arguments are presented more completely in Chapter 1 of Barro and Sala-i-Martin <ref>{{cite book | last = Barro| first = Robert J.
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| |coauthors= Xavier Sala-i-Martin
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| | title = Economic Growth
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| | publisher = [[McGraw-Hill]]
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| | location = New York
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| | year = 1995
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| | isbn = 0-07-003697-7 }}
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| </ref> and in texts such as Abel ''et al.''.<ref>{{cite book | last = Abel| first = Andrew B.
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| |coauthors= Ben S. Bernake, Gregor W. Smith & Ronald D. Kneebone
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| | title = Macroeconomics |edition=Fourth Canadian
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| | publisher = Pearson Education Canada
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| | location = Toronto
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| | year = 2005
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| | isbn = 0-321-30662-7 }}
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| </ref>
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| Let ''k'' be the capital/[[labour (economics)|labour]] ratio (i.e., [[capital (economics)|capital]] per capita), ''y'' be the resulting per capita output ( <math> y = f(k)</math> ), and ''s'' be the savings rate. The steady state is defined as a situation in which per capita output is unchanging, which implies that ''k'' be constant. This requires that the amount of saved output be exactly what is needed to (1) equip any additional workers and (2) replace any worn out capital.
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| In a steady state, therefore: <math> s f(k) = (n+d)k </math>, where ''n'' is the constant exogenous population growth rate, and ''d'' is the constant exogenous rate of depreciation of capital. Since ''n'' and ''d'' are constant and <math> f(k)</math> satisfies the [[Inada conditions]], this expression may be read as an equation connecting ''s'' and ''k'' in steady state: any choice of ''s'' implies a unique value for ''k'' (thus also for ''y'') in steady state. Since consumption is proportional to output ( <math> c = (1-s)f(k)</math> ), then a choice of value for ''s'' implies a unique level of steady state per capita consumption. Out of all possible choices for ''s'', one will produce the highest possible steady state value for ''c'' and is called the ''golden rule'' savings rate.
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| An important question for policy-makers is whether the economy is saving too much or too little. Given the interconnection of ''s'' and ''k'' in steady state, noted above, the question can be phrased: "How much capital per worker (k) is needed to achieve the maximum level of consumption per worker in the steady state?"
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| To discover the optimal capital/labour ratio, and thus the golden rule savings rate, first note that consumption can be seen as the residual output that remains after providing for the investment that maintains steady state: <math> c = f(k) - (n+d)k</math>
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| [[Differential calculus]] methods can identify which steady state value for the capital/labour ratio maximises per capita consumption. The golden rule savings rate is then implied by the connection between ''s'' and ''k'' in steady state (see above).
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| In detail, if <math> k^G </math> is the golden rule steady state level of ''k'', then <math> k = k^G </math> requires <math> dc/dk = 0 </math>, i.e. <math> df/dk - (n+d)= 0 </math>
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| <math>\mbox{Golden rule for capital/labour ratio: } \frac{ df }{ dk } = (n+d)</math>
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| The Inada conditions ensure that this rule is satisfied by a unique <math> k = k^G </math> and thus produces a unique <math> y^G = f(k^G) </math>. Since steady state requires a particular level of investment, i.e., saved output: <math> i^G = (n+d)k^G </math>, then the ''golden rule'' savings rate must be whatever is required to generate this;
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| <math>\mbox{Golden rule savings rate: } s^G=\frac{(n+d)k^G}{f(k^G)}</math>
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| Given the rule for optimal ''k'', this may also be expressed as
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| <math>\mbox{Golden rule savings rate: } s^G=\frac{mpk^G}{apk^G}</math>
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| in which <math> mpk^G </math> is the marginal product of capital ( <math> df(k)/dk </math> ) at the optimal value of ''k'' and <math> apk^G </math> is the corresponding average product of capital ( <math> f(k)/k </math> )
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| The actual values of <math> k^G </math>, <math> y^G </math>, <math> apk^G </math>, and <math> s^G </math> depend upon the precise specification of the [[production function]] <math> f(k) </math>. For example, a [[Cobb-Douglas]] specification with constant returns to scale has <math> y=f(k)=k^a </math>, hence <math> apk=k^{(a-1)} </math> and <math> mpk=ak^{(a-1)} </math>. This gives <math> s^G=a </math> and hence <math> k^G=(a/(n+d))^{1/(1-a)} </math>, <math> y^G=(a/(n+d))^{a/(1-a)} </math>.
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| == Policy that can change the savings rate ==
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| Various economic policies can have an effect on the savings rate and, given data about whether an economy is saving too much or too little, can in turn be used to approach the Golden Rule level of savings. [[Consumption tax]]es, for example, may reduce the level of consumption and increase the savings rate, whereas [[capital gains tax]]es may reduce the savings rate. These policies are often known as [[savings incentives]] in the [[Western world|west]], where it is felt that the prevailing savings rate is "too low" (below the Golden Rule rate), and [[consumption incentives]] in countries like [[Japan]] where [[demand]] is widely considered to be too weak because the savings rate is "too high" (above the Golden Rule).<ref group="note" name="SovietPolicy">Since the golden rule applies only in the steady state an economy not in that state "[[normative economics|should not]]" aspire to the golden rule savings rate, even if the precepts of [[neo-classical economics]] growth theory are accepted. For example, the [[Soviet Union]] had a famously high savings rate policy in an attempt to "catch up" to the West, the fact that this lowered present consumption below the golden rule rate was justified with the argument that [[capital accumulation]] was necessary to reach the world level of [[industrialization]], but that this was a short-term policy of [[capital deepening]].</ref>
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| === Private and public saving ===
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| Japan's high rate of private saving is offset by its high public debt. A simple approximation of this is that the government has borrowed 100% of [[GDP]] from its own citizens backed only with the promise to pay from future taxation. This does not necessarily lead to capital formation through [[investment]] (if the revenue from [[Bond (finance)|bond]] sales is spent on present government consumption rather than [[infrastructure]] development, say).
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| {{see also|crowd-out effect}}
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| === Golden rule taxes within economic models ===
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| If consumption tax rates are [[Expectation (epistemic)|expected]] to be permanent then it is hard to reconcile the common hypothesis that rising rates discourage consumption with [[rational expectations]] (since the ultimate purpose of saving is consumption.<ref name="Frankel1998">{{cite journal |last=Frankel |first=D. M. |year=1998 |title=Transitional Dynamics of Optimal Capital Taxation |journal=[[Macroeconomic Dynamics]] |volume=2 |issue=4 |pages=492–503 |doi= }} Frankel (p. 493) writes that a [[wage tax]] is the "perfect tool" for influencing the quantity of [[leisure]] consumption. Page 495 describes the problem of failing to make government commitment to a tax rate [[Game theory|credible]]).</ref> However, consumption taxes tend to vary (e.g., with changes in government or movement between countries), and so currently high consumption taxes may be expected to go away at some point in the future, creating an increased incentive for saving. The efficient level of capital income tax in the steady state has been studied in the context of a [[general equilibrium]] model and Judd (1985) has shown that the optimal tax rate is zero.<ref name="Judd1985">{{cite journal |last=Judd |first=K. L. |year=1985 |title=Redistributive Taxation in a Simple Perfect Foresight Model |journal=Journal of Public Economics |volume=28 |issue=1 |pages=59–83 |doi=10.1016/0047-2727(85)90020-9 }}</ref> However, Chamley (1986) says that in reaching the steady state (in the short run) a high capital income tax is an efficient revenue source.<ref name="Chamley1986">{{cite journal |last=Chamley |first=C. |year=1986 |title=Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives |journal=[[Econometrica]] |volume=54 |issue=3 |pages=607–622 |jstor=1911310 }} Chamley writes that before reaching the golden rule steady state capital income taxes are efficient in the sense that they do not promote [[deadweight loss]] through [[intertemporal consumption]] substitution.</ref>
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| == Notes ==
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| {{Reflist|group=note}}
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| == References ==
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| {{Reflist}}
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| [[Category:Economic growth]]
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20 year old Master Fisher Avery from Barwick, loves to spend some time kites, property developers new condos in singapore singapore and stamp collecting. Intends to retire and take the family to lots of the great heritage listed places on earth including Ruins of Loropéni.