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Saving on a Rainy Day, Borrowing for a Rainy Day

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Author Info

  • Alan, S.
  • Crossley, T.
  • Low, H.

Abstract

The aim of this paper is to understand what a recession means for individual consumers, and to model in a life-cycle framework how individuals respond to recessions. Our focus is on the sharp increase in savings rates that have been observed in the current and recent recessions. We show empirically that these saving spikes were short-lived and common to all working age groups. We then study life-cycle models in which recessions involve one or more of: (i) an aggregate permanent negative shock to individual income; (ii) an increase in the variance of idiosyncratic permanent shocks; (iii) a tightening of credit constraints; (iv) asset market crashes. In simulations and in the data we aggregate explicitly from individual behavior. We model credit tightening as a constraint on new borrowing and this generates an option value of borrowing in good times. We show that the rise in the aggregate savings ratio is driven by increases in uncertainty, rather than tightening of credit; temporary shocks to the supply of credit generate increases in saving only among younger agents.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1222.

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Date of creation: 04 May 2012
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Handle: RePEc:cam:camdae:1222

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: credit constraints; savings; recessions; uncertainty;

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References

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  1. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  2. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  3. Dimitrios Christelis & Dimitris Georgarakos & Tullio Jappelli, 2011. "Wealth Shocks, Unemployment Shocks and Consumption in the Wake of the Great Recession," CSEF Working Papers 279, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 19 Oct 2011.
  4. Andrew Glover & Jonathan Heathcote & Dirk Krueger & José-Víctor Ríos-Rull, 2011. "Intergenerational Redistribution in the Great Recession," NBER Working Papers 16924, National Bureau of Economic Research, Inc.
  5. Rajashri Chakrabarti & Donghoon Lee & Wilbert van der Klaauw & Basit Zafar, 2011. "Household debt and saving during the 2007 recession," Staff Reports 482, Federal Reserve Bank of New York.
  6. Thomas F. Crossley & Hamish Low & Cormac O’Dea, 2011. "Household Consumption Through Recent Recessions," Koç University-TUSIAD Economic Research Forum Working Papers 1132, Koc University-TUSIAD Economic Research Forum.
  7. Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
  8. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  9. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," IMF Working Papers 12/219, International Monetary Fund.
  10. Ashoka Mody & Franziska Ohnsorge & Damiano Sandri, 2012. "Precautionary Savings in the Great Recession," IMF Economic Review, Palgrave Macmillan, vol. 60(1), pages 114-138, April.
  11. Thomas F. Crossley & Hamish W. Low (corresponding author), 2011. "Job Loss, Credit Constraints and Consumption Growth," Koç University-TUSIAD Economic Research Forum Working Papers 1126, Koc University-TUSIAD Economic Research Forum.
  12. Orazio Attanasio & Renata Bottazzi & Hamish Low & Lars Nesheim & Matthew Wakefield, 2012. "Modelling the Demand for Housing over the Lifecycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 1-18, January.
  13. Mariacristina De Nardi & Eric French & David Benson, 2011. "Consumption and the Great Recession," NBER Working Papers 17688, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Saving on a Rainy Day, Borrowing for a Rainy Day
    by Christian Zimmermann in NEP-DGE blog on 2012-06-05 03:03:00
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Cited by:
  1. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," IMF Working Papers 12/219, International Monetary Fund.

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