Saving is taken to be the source of the resources needed to produce capital. It represents new materials and labor which could have been used for current consumption but which, instead, are held back (saved) in order to make possible the production of larger outputs in the future. Thus savings are the supply side of the supply and demand for new capital. -William J. Baumoll
WHILE there may be many reasons to be concerned about what determines the flow of saving in the U.S. economy, it is the role of saving as the supply side in the process of capital accumulation that seems to lie at the heart of the renewed interest in saving behavior in recent literature. That same view of saving is the focus of our attention and guides the choices we make in the empirical analysis presented here. Our major objective is to investigate the proposition that saving-in the sense of the flow of resources available for capital formation, or “loanable funds”-is determined in part by the rate of interest.