The Socially Optimal Level of Saving in Australia, 1960-61 To 1994-95.
by
Ross S. Guest and Ian M. McDonald.
July 1996
Department of Economics. University of Melbourne. Parkville Victoria
3052 Australia
ABSTRACT
In this paper a model is developed which determines the socially optimal
level of saving for a small open economy. The model also determines the
socially optimal disposition of saving between domestic capital accumulation
and overseas asset accumulation. The model is then applied to the Australian
economy for the period 1960-61 to 1994-95. For each year of that period
socially optimal levels of saving, investment and the current account of
the balance of payments are determined. The simulations suggest that the
levels of saving in Australia have been on average about five percentage
points below the optimal levels over the full period and that the optimal
outcomes for the current account were surpluses not deficits. However,
the welfare costs of these sub-optimal outcomes appears to have been small.
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