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Uninsured idiosyncratic risk and aggregate saving

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  • S. Rao Aiyagari

Abstract

We find that precautionary saving accounts for only a modest (less than 3 percentage point) increase in the aggregate saving rate, at least for moderate and empirically plausible parameter values. This finding is based on a quantitative analysis of a reasonably parameterized version of the standard growth model modified to include a large number of agents who receive uninsured idiosyncratic labor endowment shocks. In contrast to representative agent models, asset trading is quite important to individuals. The model can also account qualitatively for the positive skewness of wealth and income distributions, and significantly greater wealth inequality compared to income inequality.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 502.

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Date of creation: 1993
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Publication status: Published in Quarterly Journal of Economics (Vol. 109, No. 3, August 1994, pp. 659-684)
Handle: RePEc:fip:fedmwp:502

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Keywords: Saving and investment ; Risk;

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  1. Why recent tax rebates did not work
    by Economic Logician in Economic Logic on 2010-05-18 13:57:00
  2. Liquidity Premia and the Monetary Policy Trap
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-11-27 21:52:00

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  1. > Schools of Economic Thought, Epistemology of Economics > Economic Methodology > Dynamic Stochastic General Equilibrium
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  1. Recursive Macroeconomic Theory

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