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Saving on a Rainy Day, Borrowing for a Rainy Day

  • Alan, S.
  • Crossley, T.
  • Low, H.

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

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1222.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1222.

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Date of creation: 04 May 2012
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Handle: RePEc:cam:camdae:1222
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. 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 Nov 2014.
  2. Thomas Crossley & Hamish Low & Cormac O'Dea, 2012. "Household consumption through recent recessions," IFS Working Papers W12/13, Institute for Fiscal Studies.
  3. Mariacristina De Nardi & Eric French & David Benson, 2012. "Consumption and the Great Recession," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 1-16.
  4. Ashoka Mody & Damiano Sandri & Franziska Ohnsorge, 2012. "Precautionary Savings in the Great Recession," IMF Working Papers 12/42, International Monetary Fund.
  5. 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.
  6. Rajashri Chakrabarti & Donghoon Lee & Wilbert van der Klaauw & Basit Zafar, 2011. "Household Debt and Saving During the 2007 Recession," NBER Working Papers 16999, National Bureau of Economic Research, Inc.
  7. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  8. Crossley, T. & Low, H., 2012. "Job Loss, Credit Constraints and Consumption Growth," Cambridge Working Papers in Economics 1223, Faculty of Economics, University of Cambridge.
  9. Carroll, Christopher D. & Slacalek, Jiri & Sommer, Martin, 2012. "Dissecting saving dynamics: Measuring wealth, precautionary, and credit effects," CFS Working Paper Series 2012/10, Center for Financial Studies (CFS).
  10. Glover, Andrew & Heathcote, Jonathan & Krueger, Dirk & Ríos-Rull, José-Víctor, 2011. "Intergenerational Redistribution in the Great Recession," CEPR Discussion Papers 8329, C.E.P.R. Discussion Papers.
  11. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  12. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March.
  13. 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.
  14. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
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