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Dissecting Saving Dynamics

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Author Info

  • Christopher Carroll
  • Martin Sommer
  • Jiri Slacalek

Abstract

We argue that the U.S. personal saving rate’s long stability (from the 1960s through the early 1980s), subsequent steady decline (1980s - 2007), and recent substantial increase (2008 - 2011) can all be interpreted using a parsimonious ‘buffer stock’ model of optimal consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is affected by the gap between ‘target’ and actual wealth, with the target wealth determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the saving rate’s long-term decline, while fluctuations in net wealth and uncertainty capture the bulk of the business-cycle variation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/219.

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Length: 47
Date of creation: 01 Sep 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/219

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Related research

Keywords: Credit; Credit restraint; Economic models; Income; Private savings; unemployment; disposable income; unemployment risk; consumption function; income growth; unemployed; unemployment rate; labor income; permanent income; permanent income hypothesis; income inequality; household wealth; marginal propensity to consume; permanent unemployment; national income; level of consumption; consumer spending; employment; consumption decline; business cycles; aggregate income; general equilibrium; aggregate demand; consumer sentiment; employment status; household net worth; high unemployment; consumer durables; unemployed population; government spending; permanent ? income; consumption over time; capital account; personal disposable income; real interest rate; income ? growth; consumption declines; unemployment benefit; unemployment insurance; national saving; consumer confidence; expected unemployment; response of consumption; capital income; current income; future expected income; consumption path; saving function;

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References

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  1. Xavier Ragot & Edouard Challe, 2011. "Precautionary Saving over the Business Cycle," 2011 Meeting Papers 517, Society for Economic Dynamics.
  2. Carroll, Christopher D. & Toche, Patrick, 2009. "A tractable model of buffer stock saving," CFS Working Paper Series 2009/14, Center for Financial Studies (CFS).
  3. Karen Dynan, 2012. "Is a Household Debt Overhang Holding Back Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 299-362.
  4. Bent E. Sørensen & Yuliya Demyanyk & Charlotte Ostergaard, 2005. "U.S. Banking Deregulation, Small Businesses,and Interstate Insurance of Personal Income," Working Papers 2005-02, Department of Economics, University of Houston.
  5. Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
  6. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series qt44k6g6vx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Sabelhaus, John & Song, Jae, 2010. "The great moderation in micro labor earnings," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 391-403, May.
  8. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
  9. Sule Alan & Thomas Crossley & Hamish Low, 2012. "Saving on a Rainy Day, Borrowing for a Rainy Day," Koç University-TUSIAD Economic Research Forum Working Papers 1212, Koc University-TUSIAD Economic Research Forum.
  10. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, May.
  11. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  12. Janine Aron & John V. Duca & John Muellbauer & Keiko Murata & Anthony Murphy, 2012. "Credit, Housing Collateral, And Consumption: Evidence From Japan, The U.K., And The U.S," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 58(3), pages 397-423, 09.
  13. David Bloom & David Canning & Rick Mansfield & Michael Moore, 2006. "Demographic Change, Social Security Systems, and Savings," PGDA Working Papers 1906, Program on the Global Demography of Aging.
  14. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers dp1195, Centre for Economic Performance, LSE.
  15. Ashoka Mody & Damiano Sandri & Franziska Ohnsorge, 2012. "Precautionary Savings in the Great Recession," IMF Working Papers 12/42, International Monetary Fund.
  16. Jonathan McCarthy & Richard W. Peach, 2002. "Monetary policy transmission to residential investment," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 139-158.
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Cited by:
  1. Christopher D. Carroll, 2012. "Representing Consumption and Saving Without A Representative Consumer," NBER Chapters, in: Measuring Economic Sustainability and Progress National Bureau of Economic Research, Inc.

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