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Precautionary Savings, LifeCycle and Macroeconomics

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  • Pierre-Olivier Gourinchas

    (Princeton University)

Abstract

This paper explores the implications of precautionary saving and life cycle behavior for business cycle fluctuations. Existing heterogenous agent models of the business cycle, with labor income uncertainty and incomplete markets, yield aggregate quantitative predictions that are almost indistinguishable from their representative agent counterpart. This 'quasi' aggregation theorem arises when idiosyncratic shocks are largely transitory. This paper revisits these results in the context of an overlapping generations model with two sources of heterogeneity: age and idiosyncratic shocks to labor income. Surprisingly, even with permanent labor income shocks and finite lives, the previous results are shown to hold: aggregate dynamics are fully characterized by the evolution of the aggregate capital stock. The implications for welfare and risk sharing are derived.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0793.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0793

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Cited by:
  1. Stephen Turnovsky & Marcelo Bianconi, . "The Welfare Gains from Stabilization in a Stochastically Growing Economy with Idiosyncratic Shocks and Flexible Labor Supply," Working Papers UWEC-2004-08-P, University of Washington, Department of Economics.
  2. Pedro Silos, 2005. "Housing, portfolio choice, and the macroeconomy," Working Paper 2005-21, Federal Reserve Bank of Atlanta.
  3. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
  4. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," NBER Working Papers 8107, National Bureau of Economic Research, Inc.
  5. Jianjun Miao, 2004. "Competitive Equilibria of Economies with a Continuum of Consumers and Aggregate Shocks," CEMA Working Papers 460, China Economics and Management Academy, Central University of Finance and Economics.
  6. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc.
  7. Jonathan Parker & Bruce Preston, 2002. "Precautionary Saving and Consumption Fluctuations," NBER Working Papers 9196, National Bureau of Economic Research, Inc.
  8. Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "Houses as collateral: has the link between house prices and consumption in the U.K. changed?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 163-177.
  9. Ricardo M. Sousa, 2007. "Expectations, Shocks, and Asset Returns," NIPE Working Papers 29/2007, NIPE - Universidade do Minho.

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