The Vanishing Savings Motive

Abstract: When the production sector of a small open economy with an internationally determined interest rate adjusts gradually to some exogenous shocks, then during a transitional period wage income also does. The paper argues that slowly falling (increasing) wages create transitory life-cycle savings (dis-)incentives which vanish in the long-run when wages become stationary again. Such a transitory life-cycle savings component comes on top of a base component created by the permanently operating long-run savings incentives, and it easily gives rise to non-monotonic adjustment of assets. Assets may even move first in a direction that is opposite to the implied long-run changes.;