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Precautionary Saving Unfettered

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  • James Feigenbaum

Abstract

Precautionary saving has engendered much interest, both because of the possibility that it can explain why, contrary to the basic Lifecycle/Permanent-Income Hypothesis, consumption roughly tracks income over the lifecycle and because of speculation that precautionary saving might account for a large fraction of aggregate saving. However, recent findings have indicated that the effects of precautionary saving are much less significant than was first thought. Early researchers did not take into account general equilibrium effects. Furthermore, most research into precautionary saving has employed buffer-stock saving models that also incorporate a borrowing constraint (either imposed exogenously or resulting endogenously from assumptions about the income process). After separating out the effects of uncertainty from the effects of the borrowing constraint, one finds that most buffer-stock saving can be accounted for by the borrowing constraint. However, buffer-stock models make the simple but unrealistic assumption that absolutely no borrowing can occur. While it has generally been assumed that borrowing constraints and precautionary saving are complementary, when these two frictions operate simultaneously a tight no-borrowing constraint will dominate. Here, we show that when borrowing is unconstrained, precautionary saving can, indeed, have significant effects. Moreover, a general equilibrium model of precautionary saving and unconstrained borrowing can better explain the lifecycle consumption profile than the corresponding buffer-stock saving model

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Bibliographic Info

Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 227.

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Date of creation: Jan 2006
Date of revision: Jan 2006
Handle: RePEc:pit:wpaper:227

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  1. Christopher D Carroll & Miles S Kimball, 2001. "Liquidity Constraints and Precautionary Saving," Economics Working Paper Archive 455, The Johns Hopkins University,Department of Economics.
  2. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  3. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer, vol. 16(4), pages 487-513, August.
  2. Francis, Johanna L., 2009. "Wealth and the capitalist spirit," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 394-408, September.
  3. James Feigenbaum & Frank N. Caliendo & Emin Gahramanov, 2009. "Optimal Irrational Behavior," Working Papers 200901, Utah State University, Department of Economics and Finance.
  4. Mathieu-Bolh, Nathalie, 2010. "Welfare improving distributionally neutral tax reforms," Economic Modelling, Elsevier, vol. 27(5), pages 1253-1268, September.
  5. James A. Feigenbaum & Geng Li, 2010. "A semiparametric characterization of income uncertainty over the life cycle," Finance and Economics Discussion Series 2010-42, Board of Governors of the Federal Reserve System (U.S.).
  6. James Feigenbaum, 2008. "A Nonparametric Characterization of Income Uncertainty over the Lifecycle," Working Papers 359, University of Pittsburgh, Department of Economics, revised Jul 2008.
  7. Feigenbaum, James, 2008. "Information shocks and precautionary saving," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3917-3938, December.
  8. Shantanu Bagchi, 2011. "Can overconfidence explain the consumption hump?," Journal of Economics and Finance, Springer, vol. 35(1), pages 41-70, January.
  9. Feigenbaum, James & Caliendo, Frank N., 2010. "Optimal irrational behavior in continuous time," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1907-1922, October.
  10. James Feigenbaum & Geng Li, 2008. "Lifecycle dynamics of income uncertainty and consumption," Finance and Economics Discussion Series 2008-27, Board of Governors of the Federal Reserve System (U.S.).
  11. T. Findley & Frank Caliendo, 2008. "The behavioral justification for public pensions: a survey," Journal of Economics and Finance, Springer, vol. 32(4), pages 409-425, October.
  12. Feigenbaum, James, 2008. "Can mortality risk explain the consumption hump?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 844-872, September.
  13. Frank N. Caliendo, 2009. "Is Social Security behind the Collapse of Personal Saving?," CESifo Working Paper Series 2746, CESifo Group Munich.
  14. James Feigenbaum & Geng Li, 2011. "Household income uncertainties over three decades," Finance and Economics Discussion Series 2011-25, Board of Governors of the Federal Reserve System (U.S.).
  15. Nathalie Mathieu-Bolh, 2011. "Optimal taxation and borrowing constraints," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 36(31), pages 9-53, January-j.
  16. Feigenbaum, James, 2011. "Precautionary saving or denied dissaving," Economic Modelling, Elsevier, vol. 28(4), pages 1559-1572, July.

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