Income Inequality and Aggregate Saving

Abstract: We suggest that the prevalence of social norms of minimum consumption can result in consumption behaviour that differs from that predicted by the permanent income/life cycle hypothesis. We model such social norms as a belief constraint in the intertemporal consumption decision and show that if the resulting threshold effect is present at low income levels, aggregate saving will increase as income becomes more equally distributed. Evidence from US consumption data suggests that a threshold effect is prevalent at low income levels. Using data from the World Income Inequality Study, we are not, however, able to show any statistically significant relation between income inequality and aggregate saving in the OECD countries.