The Tricking Up Excess Savings

Matt Rognlie @ludwigstraub @a_auclert argue that it will take up to five years for excess savings to work though the systems as individuals with higher marginal propensity to consume generate income for individuals with higher savings rates.

“…Deficit-financed fiscal transfers generate excess savings. One person’s spending is another person’s income. As we show, taking this fact into account implies that excess savings from debt-financed transfers have much longer-lasting effects than a naive calculation would suggest. In a closed economy, unless the government pays down the debt used to finance the transfers, excess savings do not go away as households spend them down. Instead, the effect of excess savings on aggregate demand slowly dissipates as they “trickle up” the wealth distribution to agents with lower MPCs. Tight monetary policy speeds up this process, but this effect is likely to be quantitatively modest. The partial equilibrium scenario summarizes the conventional wisdom according to which the effect of excess savings will dissipate in a few quarters. By contrast, our benchmark scenario suggests that these effects will stick around for roughly 5 years….”

Core of paper

“…Because excess savings and their distribution across the population intuitively matter for aggregate demand, economists have paid a considerable amount of attention to estimating both. In this paper, we provide a tractable Heterogeneous Agent New Keynesian model that explicitly maps the distribution of excess savings to the path of output, and that explains the process by which their effect dissipates. We use this framework to estimate the likely contribution of excess savings to aggregate spending in the coming years under various assumptions about the marginal propensities to consume (MPCs) of agents holding the savings and scenarios for monetary policy. Our framework recognizes that one person’s spending is another person’s income. As we show, taking this fact into account implies that excess savings from debt-financed transfers have much longer-lasting effects than a naive calculation would suggest. In a closed economy, unless the government pays down the debt used to finance the transfers, excess savings do not go away as households spend them down. Instead, the effect of excess savings on aggregate demand slowly dissipates as they “trickle up” the wealth distribution to agents with lower MPCs. Tight monetary policy speeds up this process, but this effect is likely to be quantitatively modest….”

Implication For US Economy Post-Pandemic

“…Table 1 summarizes our results by displaying the duration of output and excess savings for the middle class and the rich under each of our scenarios. The partial equilibrium scenario summarizes the conventional wisdom according to which the effect of excess savings will dissipate in a few quarters. By contrast, our benchmark scenario suggests that these effects will stick around for roughly 5 years. These numbers are larger if MPCs are lower, and are robust to plausible alternative calibrations. Rational expectations about the future boom make the response much larger on impact due to current spending out of anticipated income, which turns out to speed up the trickling up process. Tight monetary policy, on the other hand, also speeds up tickling up, but it does so by mitigating the effects of excess savings on demand. In either case, however, the duration of excess savings and output remains more than twice as long as the conventional wisdom suggests….”

Adrien Auclert, Matthew Rognlie and Ludwig Straub, “The Tricking Up Excess Savings,” National Bureau of Economic Research, January 2023, https://www.nber.org/papers/w30900