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Precautionary Saving over the Business Cycle

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  • Xavier Ragot

    (Banque de France & PSE)

  • Edouard Challe

    (Ecole Polytechnique & Banque de France)

Abstract

In this paper, we present a tractable model of time-varying precautionary saving behaviour due to changes in uninsured unemployment risk. In our model, agents facing incomplete markets and borrowing constraints respond to changes in labour market conditions by altering their buffer stock of precautionary wealth, with a direct impact on current consumption. The model is calibrated to match the evidence on the share of permanent income consumers and the distribution of wealth in the U.S. economy. We find a large, but relatively short-lived, impact of the precautionary motive on aggregate consumption in response to a typical labour market shock. The implications of the precautionary motive for consumption Euler equation tests are also discussed.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 517.

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Date of creation: 2011
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Handle: RePEc:red:sed011:517

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Citations

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Cited by:
  1. Yvonne Adema & Lorenzo Pozzi, 2012. "Business Cycle Fluctuations and Private Savings in OECD Countries: A Panel Data Analysis," Tinbergen Institute Discussion Papers, Tinbergen Institute 12-144/VI, Tinbergen Institute.
  2. Paul Beaudry & Dana Galizia & Franck Portier, 2014. "Reconciling Hayek's and Keynes Views of Recessions," NBER Working Papers 20101, National Bureau of Economic Research, Inc.
  3. Luca Fornaro, 2012. "International debt deleveraging," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1401, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2013.
  4. Christopher Carroll & Jiri Slacalek & Martin Sommer, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 602, The Johns Hopkins University,Department of Economics.
  5. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers, Society for Economic Dynamics 1414, Society for Economic Dynamics.
  6. Xavier Ragot & Julien Matheron & Juan Rubio-Ramirez & Edouard Challe, 2013. "Precautionary Saving and Aggregate Demand," 2013 Meeting Papers, Society for Economic Dynamics 932, Society for Economic Dynamics.
  7. Solomon, Bernard Daniel, 2010. "Firm leverage, household leverage and the business cycle," MPRA Paper 26504, University Library of Munich, Germany.
  8. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers 12/219, International Monetary Fund.

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