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Saving on a rainy day, borrowing for a rainy day

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Author Info

  • Sule Alan

    ()
    (Institute for Fiscal Studies and University of Cambridge)

  • Thomas Crossley

    ()
    (Institute for Fiscal Studies and University of Cambridge)

  • Hamish Low

    ()
    (Institute for Fiscal Studies and Trinity College, Cambridge)

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) as set 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 Institute for Fiscal Studies in its series IFS Working Papers with number W12/11.

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Date of creation: May 2012
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Handle: RePEc:ifs:ifsewp:12/11

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Keywords: Credit constraints; savings; recessions; uncertainty;

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References

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  1. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  2. Thomas F. Crossley & Hamish Low & Cormac O'Dea, 2013. "Household Consumption through Recent Recessions," Fiscal Studies, Institute for Fiscal Studies, vol. 34(2), pages 203-229, 06.
  3. 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.
  4. 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.
  5. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  6. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio, 2011. "Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession," CFS Working Paper Series 2011/27, Center for Financial Studies (CFS).
  7. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  8. Rajashri Chakrabarti & Donghoon Lee & Wilbert van der Klaauw & Basit Zafar, 2013. "Household Debt and Saving during the 2007 Recession," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy National Bureau of Economic Research, Inc.
  9. 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.
  10. 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.
  11. Carroll, Christopher D. & Slacalek, Jiri & Sommer, Martin, 2012. "Dissecting saving dynamics: Measuring wealth, precautionary, and credit effects," CFS Working Paper Series 2012/10, Center for Financial Studies (CFS).
  12. Mariacristina De Nardi & Eric French & David Benson, 2011. "Consumption and the Great Recession," NBER Working Papers 17688, National Bureau of Economic Research, Inc.
  13. Crossley, T. & Low, H., 2012. "Job Loss, Credit Constraints and Consumption Growth," Cambridge Working Papers in Economics 1223, Faculty of Economics, University of Cambridge.
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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 & Jiri Slacalek & Martin Sommer, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," Economics Working Paper Archive 602, The Johns Hopkins University,Department of Economics.
  2. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers 12/219, International Monetary Fund.

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