New Household Saving Behavior in the Dynamic GTAP model

In the dynamic GTAP model (GTAP-Dyn) saving is a fixed proportion of income in each region. There are two unwelcome implications of this. First, net foreign positions grow without bound in GTAP-Dyn simulations. The second problem is that as economies with high savings rates, like China, grow, there is a glut of global savings and, as a result, of investment and capital in the world. Because of excessive investment, rates of return to capital fall without bound. This paper documents new household saving behavior in the dynamic GTAP model. In this work we adopt very practical approach motivated by the stylized fact that gross foreign assets and liabilities do not diverge through time in reality nearly as much as in standard GTAP-Dyn. We modify the theoretical structure of the GTAP-Dyn so that the saving rate in each region is endogenous and is a function of the ratio of wealth to income. New theoretical structure supports balanced growth scenarios, stabilizes global rate of return to capital, and prevents net external assets or liabilities from growing implausibly large.