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Cyclical Uncertainty, Precautionary Saving and Economic Growth

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  • Smith, R Todd

Abstract

This paper studies the interaction between cyclical uncertainty, precautionary saving and economic growth in a stochastic endogenous growth model. The analysis provides insight into the potential connection between technological uncertainty of the sort popularized in real business cycle models and the determinants of economic growth in a stochastic version of a popular model of endogenously determined economic growth. The magnitude of the link between cyclical uncertainty and growth is quantified and found to be small in terms of its effect on the growth rate, but possibly large in terms of its effect on levels of macroeconomic variables. Moreover, the welfare costs of reduced cyclical uncertainty can be substantial, owing to the lower historical rate of capital accumulation induced by a decrease in precautionary saving. The chief implications of the model are found to be roughly consistent with the postwar experience of several countries, although the predictions of the model with regard to growth rates are too small to explain much of the variation in growth rates across time or across countries. Copyright 1996 by The London School of Economics and Political Science.

Suggested Citation

  • Smith, R Todd, 1996. "Cyclical Uncertainty, Precautionary Saving and Economic Growth," Economica, London School of Economics and Political Science, vol. 63(251), pages 477-494, August.
  • Handle: RePEc:bla:econom:v:63:y:1996:i:251:p:477-94
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    Cited by:

    1. Clemens, Christiane & Soretz, Susanne, 1999. "Konsequenzen des Zins- und Einkommensrisikos auf das wirtschaftliche Wachstum," Hannover Economic Papers (HEP) dp-221, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    2. Zied Ftiti, 2010. "Stabilité-croissance et performance économique : quelle relation selon une revue de la littérature ?," Post-Print halshs-00537009, HAL.
    3. Clemens, Christiane, 1999. "Income Taxation, Government Expenditure, and Long-Run Stochastic Growth," Hannover Economic Papers (HEP) dp-220, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    4. D Varvarigos, 2004. "Non-neutrality and Uncertainty in a Model of Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 41, Economics, The Univeristy of Manchester.
    5. Varvarigos, Dimitrios, 2008. "Sustained output growth under uncertainty: A simple model with human capital," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1468-1478, December.
    6. Galindev Ragchaasuren, 2007. "Monetary Stabilisation Policy and Long-run Growth," Money Macro and Finance (MMF) Research Group Conference 2006 48, Money Macro and Finance Research Group.
    7. Keith Blackburn & Dimitrios Varvarigos, 2005. "Growth, Uncertainty and Finance," The School of Economics Discussion Paper Series 0525, Economics, The University of Manchester.
    8. Ragchaasuren, Galindev, 2005. "The Relationship between Growth and Volatility under Alternative Shocks," Economics Discussion Papers 9980, University of Essex, Department of Economics.
    9. Keith Blackburn & Alessandra Pelloni, 2005. "Growth, cycles, and stabilization policy," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 262-282, April.
    10. K Blackburn & D Varvarigos, 2006. "Human Capital Accumulation in a Stochastic Environment: Some New Results on the Relationship Between Growth and Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 74, Economics, The Univeristy of Manchester.
    11. Pierre-Richard Agénor, 2016. "Aid Volatility, Human Capital, and Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 219, Economics, The Univeristy of Manchester.
    12. Dimitrios Varvarigos, 2007. "Sustained Output Growth Under Uncertainty: A Simple Model With Human Capital," Discussion Paper Series 2007_20, Department of Economics, Loughborough University, revised Aug 2007.
    13. Ragchaasuren Galindev, 2008. "Uncertainty, Learning And Growth," Manchester School, University of Manchester, vol. 76(5), pages 539-548, September.
    14. Arthur Hau & Lily Jiang, 2005. "Economic Growth and Medicare Funding Systems," Contemporary Economic Policy, Western Economic Association International, vol. 23(1), pages 17-27, January.
    15. Côté, Denise & Johnson, Marianne, 1998. "Consumer Attitudes, Uncertainty, and Consumer Spending," Staff Working Papers 98-16, Bank of Canada.
    16. K Blackburn & D Varvarigos, 2005. "Growth, Uncertainty and Finance," Centre for Growth and Business Cycle Research Discussion Paper Series 48, Economics, The Univeristy of Manchester.
    17. Ragchaasuren, Galindev, 2005. "On the Effect of Monetary Stabilisation Policy on Long-run Growth," Economics Discussion Papers 8883, University of Essex, Department of Economics.
    18. Keith Blackburn & Dimitrios Varvarigos, 2006. "Human Capital Accumulation in a Stochastic Environment: Some New Results on the Relationship Between Growth and Volatility," The School of Economics Discussion Paper Series 0618, Economics, The University of Manchester.
    19. Clemens, Christiane & Soretz, Susanne, 2004. "Optimal fiscal policy, uncertainty, and growth," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 679-697, December.

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