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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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File URL: http://crr.bc.edu/working-papers/the-response-of-household-saving-to-the-large-shock-of-german-reunification/
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Bibliographic Info

Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2008-21.

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Length: 53 pages
Date of creation: Oct 2008
Date of revision: Dec 2008
Handle: RePEc:crr:crrwps:wp2008-21

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  1. Wilke, Ralf A., 2004. "Semiparametric Estimation of Consumption Based Equivalence Scales: The Case of Germany," ZEW Discussion Papers 04-53, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Bonin, Holger & Euwals, Rob, 2001. "Participation Behavior of East German Women after German Unification," IZA Discussion Papers 413, Institute for the Study of Labor (IZA).
  3. repec:att:wimass:9722 is not listed on IDEAS
  4. Christopher D. Carroll & David N. Weil, 1993. "Saving and Growth: A Reinterpretation," NBER Working Papers 4470, National Bureau of Economic Research, Inc.
  5. Borsch-Supan, Axel & Reil-Held, Anette & Rodepeter, Ralf & Schnabel, Reinhold & Winter, Joachim, 2001. "The German Savings Puzzle," Research in Economics, Elsevier, vol. 55(1), pages 15-38, March.
  6. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  7. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  8. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc.
  9. Hans-Werner Sinn, 2000. "Germany's Economic Unification: An Assessment after Ten Years," NBER Working Papers 7586, National Bureau of Economic Research, Inc.
  10. M. Dolores Collado & Martín Browning, 1999. "-The Response Of Expenditures To Anticipated Income Changes: Panel Data Estimates," Working Papers. Serie AD 1999-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  11. Martin Browning & Thomas F. Crossley, 2000. "The Life Cycle Model of Consumption and Saving," Social and Economic Dimensions of an Aging Population Research Papers 28, McMaster University.
  12. Sinn, Gerlinde & Sinn, Hans-Werner, 1992. "Kaltstart. Volkswirtschaftliche Aspekte der Deutschen Vereinigung," Monograph, Mohr Siebeck, Tübingen, edition 2, number urn:isbn:9783161459429, Octomber.
  13. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
  14. Matthew D. Shapiro & Joel Slemrod, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," NBER Working Papers 4344, National Bureau of Economic Research, Inc.
  15. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  16. Souleles, Nicholas S., 2000. "College tuition and household savings and consumption," Journal of Public Economics, Elsevier, vol. 77(2), pages 185-207, August.
  17. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February.
  18. repec:att:wimass:9724 is not listed on IDEAS
  19. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July.
  20. Biewen, Martin, 2000. "Income Inequality in Germany during the 1980s and 1990s," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(1), pages 1-19, March.
  21. Merz, Joachim & Faik, Jürgen, 1994. "Equivalence Scales Based on Revealed Preference Consumption Expenditure Microdata - The Case of West Germany," MPRA Paper 16297, University Library of Munich, Germany.
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