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The Response of Household Saving to the Large Shock of German Reunification

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  • Nicola Fuchs-Schundeln
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    Abstract

    German reunification was a large, unexpected shock for East Germans. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. I derive three stylized features concerning the saving behavior of East versus West Germans after reunification: (i) East Germans have higher saving rates than West Germans; (ii) this East-West gap is increasing in age at reunification; and (iii) for every cohort, this gap is declining over time. I show that a comprehensive life-cycle model can replicate these features. The precautionary saving motive is essential for the success of the model. (JEL D14, D91, E21)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.5.1798
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 98 (2008)
    Issue (Month): 5 (December)
    Pages: 1798-1828

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    Handle: RePEc:aea:aecrev:v:98:y:2008:i:5:p:1798-1828

    Note: DOI: 10.1257/aer.98.5.1798
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    Cited by:
    1. Giavazzi, Francesco & McMahon, Michael, 2008. "Policy Uncertainty and Precautionary Savings," CEPR Discussion Papers 6766, C.E.P.R. Discussion Papers.
    2. Corneo, Giacomo & Keese, Matthias & Schröder, Carsten, 2008. "Can governments boost voluntary retirement savings via tax incentives and subsidies? A German case study for low-income households," Economics Working Papers 2008,18, Christian-Albrechts-University of Kiel, Department of Economics.
    3. Jüßen, Falko & Bayer, Christian, 2013. "Happiness and the Persistence of Income Shocks," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79915, Verein für Socialpolitik / German Economic Association.
    4. Corneo, Giacomo & Keese, Matthias & Schröder, Carsten, 2010. "The effect of saving subsidies on household saving: Evidence from Germany," Discussion Papers 2010/3, Free University Berlin, School of Business & Economics.
    5. Xuan Liu & Zhiwei Cui, 2011. "Approximation Errors of Perturbation Methods in Solving a Class of Dynamic Stochastic General Equilibrium Models," Computational Economics, Society for Computational Economics, vol. 38(2), pages 107-128, August.
    6. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
    7. Cristina Barceló & Ernesto Villanueva, 2010. "The response of household wealth to the risk of losing the job: evidence from differences in firing costs," Banco de Espa�a Working Papers 1002, Banco de Espa�a.
    8. Christian Pfarr & Udo Schneider, 2011. "Anreizeffekte und Angebotsinduzierung im Rahmen der Riester‐Rente: Eine empirische Analyse geschlechts‐ und sozialisationsbedingter Unterschiede," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(1), pages 27-46, 02.
    9. Bick, Alexander & Choi, Sekyu, 2013. "Revisiting the effect of household size on consumption over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2998-3011.
    10. Gert G. Wagner, 2009. "The German Socio-Economic Panel (SOEP) in the Nineties: An Example of Incremental Innovations in an Ongoing Longitudinal Study," SOEPpapers on Multidisciplinary Panel Data Research 257, DIW Berlin, The German Socio-Economic Panel (SOEP).

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