Income Distribution and Aggregate Saving: A Non-Monotonic Relationship

Drawing on a panel of advanced economies, this paper documents a concave and non-monotonic link between inequality and the aggregate household saving rate. We find that, at a low level of inequality, more inequality is associated with higher saving; but we also show that a negative relationship between inequality and saving prevails where inequality is high. Using different empirical approaches, we locate the turning point, where the marginal effect of inequality turns from positive to negative, at a net income Gini coefficient of around 30. Moreover, we show that the relationship between inequality and saving also depends on financial market conditions. While inequality increases saving, when credit is scarce it tends to reduce saving at high levels of credit. This paper primarily focuses on household saving, yet we also find some evidence for a non-monotonic effect of inequality on private saving, national saving, and the current account balance.