Inflation and the savings rate

Abstract

In this paper we examine two explanations of the observed positive relationship between inflation rates and savings rates in Canada and the United States. Several models are estimated using quarterly time-series data from both countries, and the best of these are subjected to a variety of tests. One of the two explanations appears to be broadly consistent with the data. It is that the observed relationship arises primarily because, in times of inflation, measured income and measured savings overstate the corresponding real and perceived quantities.