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Quantifying Borrowing Constraints and Precautionary Savings

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  • Makoto Nirei

    (Utah State University)

Abstract

This paper quantifies the effects of precautionary savings. It demonstrates that Zeldes' estimate (1989) of excess consumption growth for low asset holders is consistent with a dynamic general equilibrium model with uninsurable endowment shocks when borrowing is constrained at three months' worth of average wage income. I propose a Monte Carlo simulation of the stationary equilibrium as a method of indirectly testing the hypotheses of a no-borrowing specification and a natural debt limit specification. At the estimated borrowing constraint, an increase in endowment shocks within the range of empirical findings can cause a 1.6% increase in the savings rate and a 6.9% increase in capital. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.01.002
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 2 (April)
Pages: 353-363

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Handle: RePEc:red:issued:v:9:y:2006:i:2:p:353-363

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Related research

Keywords: liquidity constraint; precautionary savings; borrowing constraint; natural debt limit; excess consumption growth; uninsured endowment shock;

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References

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  1. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  2. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 135, Board of Governors of the Federal Reserve System (U.S.).
  3. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
  4. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
  5. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers, University of Copenhagen. Department of Economics 96-01, University of Copenhagen. Department of Economics.
  6. Christopher D Carroll & Miles S Kimball, 2001. "Liquidity Constraints and Precautionary Saving," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 455, The Johns Hopkins University,Department of Economics.
  7. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(6), pages 1104-13, December.
  8. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 17(5-6), pages 953-969.
  9. Huggett, Mark & Ospina, Sandra, 2001. "Aggregate precautionary savings: when is the third derivative irrelevant?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 373-396, October.
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Cited by:
  1. Reichling, Felix, 2006. "Optimal Unemployment Insurance in Labor Market Equilibrium when Workers can Self-Insure," MPRA Paper 5362, University Library of Munich, Germany, revised 16 Oct 2007.
  2. Lee, Jeong-Joon & Sawada, Yasuyuki, 2010. "Precautionary saving under liquidity constraints: Evidence from rural Pakistan," Journal of Development Economics, Elsevier, Elsevier, vol. 91(1), pages 77-86, January.
  3. Feigenbaum, James, 2011. "Precautionary saving or denied dissaving," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1559-1572, July.

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