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

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  • Nicola Fuchs-Schündeln

Abstract

German reunification was a large, unexpected shock for East Germans, with different economic consequences for different birth cohorts. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. In the empirical part, I derive three stylized features concerning the saving behavior of East vs. West Germans in the 1990s: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this East-West gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time. The theoretical part investigates whether a comprehensive life cycle model can predict these three features. I find strong evidence in favor of rational, forward looking saving behavior. The precautionary saving motive is essential in replicating the features from the data.

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  • Nicola Fuchs-Schündeln, 2008. "The Response of Household Saving to the Large Shock of German Reunification," Working Papers, Center for Retirement Research at Boston College wp2008-21, Center for Retirement Research, revised Dec 2008.
    • Handle: RePEc:crr:crrwps:wp2008-21
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    21. Corneo, Giacomo & Keese, Matthias & Schröder, Carsten, 2010. "The Effect of Saving Subsidies on Household Saving – Evidence from Germanys," Ruhr Economic Papers 170, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    22. 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.
    23. 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.
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