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Saving on a Rainy Day, Borrowing for a Rainy Day

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Author Info

  • Sule Alan

    ()
    (University of Cambridge and Koc University)

  • Thomas Crossley

    ()
    (University of Cambridge and Koc University)

  • Hamish Low

    (University of Cambridge and Institute for Fiscal Studies)

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) asset 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 tighening of credit; temporary shocks to the supply of credit generate increases in saving only among younger agents.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1212.pdf
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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1212.

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Length: 35 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:koc:wpaper:1212

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Keywords: credit constraints; savings; recessions; uncertainty.;

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References

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  1. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  2. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  3. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  4. Mariacristina De Nardi & Eric French & David Benson, 2011. "Consumption and the Great Recession," NBER Working Papers 17688, National Bureau of Economic Research, Inc.
  5. Carroll, Christopher & Slacalek, Jiri & Sommer, Martin, 2012. "Dissecting saving dynamics: measuring wealth, precautionary and credit effects," Working Paper Series 1474, European Central Bank.
  6. 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.
  7. Thomas F. Crossley & Hamish W. Low (corresponding author), 2011. "Job Loss, Credit Constraints and Consumption Growth," Koç University-TUSIAD Economic Research Forum Working Papers 1126, Koc University-TUSIAD Economic Research Forum.
  8. 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.
  9. Jose-Victor Rios Rull & Jonathan Heathcote & Dirk Krueger & Andy Glover, 2011. "Intergenerational Redistribution in the Great Recession," 2011 Meeting Papers 141, Society for Economic Dynamics.
  10. 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.
  11. 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.
  12. Rajashri Chakrabarti & Donghoon Lee & Wilbert van der Klaauw & Basit Zafar, 2011. "Household debt and saving during the 2007 recession," Staff Reports 482, Federal Reserve Bank of New York.
  13. Dimitrios Christelis & Dimitris Georgarakos & Tullio Jappelli, 2011. "Wealth Shocks, Unemployment Shocks and Consumption in the Wake of the Great Recession," CSEF Working Papers 279, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 19 Oct 2011.
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Citations

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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