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Precautionary Savings in the Great Recession

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  • Ashoka Mody
  • Franziska Ohnsorge
  • Damiano Sandri

Abstract

Heightened uncertainty since the onset of the Great Recession has materially increased saving rates, contributing to lower consumption and GDP growth. Consistent with a model of precautionary savings in the face of uncertainty, the paper finds for a panel of advanced economies that greater labor income uncertainty is significantly associated with higher household savings. These results are robust to controlling for other determinants of saving rates, including wealth-to-income ratios, the government fiscal balance, demographics, credit conditions, and global growth and financial stress. The estimates imply that at least two-fifths of the sharp increase in household saving rates between 2007 and 2009 can be attributed to the precautionary savings motive.

Suggested Citation

  • Ashoka Mody & Franziska Ohnsorge & Damiano Sandri, 2012. "Precautionary Savings in the Great Recession," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(1), pages 114-138, April.
    • Handle: RePEc:pal:imfecr:v:60:y:2012:i:1:p:114-138
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