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The Response of Household Saving to the Large Shock of German Reunification

  • Nicola Fuchs-Schündeln

German reunification was a large, unexpected shock for East Germans, with different economic consequences for different birth cohorts. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. In the empirical part, I derive three stylized features concerning the saving behavior of East vs. West Germans in the 1990s: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this East-West gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time. The theoretical part investigates whether a comprehensive life cycle model can predict these three features. I find strong evidence in favor of rational, forward looking saving behavior. The precautionary saving motive is essential in replicating the features from the data.

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File URL: http://crr.bc.edu/working-papers/the-response-of-household-saving-to-the-large-shock-of-german-reunification/
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Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2008-21.

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Length: 53 pages
Date of creation: Oct 2008
Date of revision: Dec 2008
Handle: RePEc:crr:crrwps:wp2008-21
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  1. Börsch-Supan, Axel & Reil-Held, Anette & Rodepeter, Ralf & Schnabel, Reinhold & Winter, Joachim, 2000. "The German Savings Puzzle," Papers 01-07, Sonderforschungsbreich 504.
  2. Holger Bonin & Rob Euwals, 2002. "Participation Behavior of East German Women after German Unification," William Davidson Institute Working Papers Series 477, William Davidson Institute at the University of Michigan.
  3. Shapiro, Matthew D & Slemrod, Joel, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," American Economic Review, American Economic Association, vol. 85(1), pages 274-83, March.
  4. Souleles, Nicholas S., 2000. "College tuition and household savings and consumption," Journal of Public Economics, Elsevier, vol. 77(2), pages 185-207, August.
  5. Wilke, Ralf A., 2005. "Semiparametric Estimation of Consumption Based Equivalence Scales: The Case of Germany," ZEW Discussion Papers 04-53 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Sinn, Gerlinde & Sinn, Hans-Werner, 1992. "Kaltstart. Volkswirtschaftliche Aspekte der Deutschen Vereinigung," Monograph, Mohr Siebeck, Tübingen, edition 2, number urn:isbn:9783161459429, May.
  7. Martin Browning & M. Dolores Collado, 2001. "The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates," American Economic Review, American Economic Association, vol. 91(3), pages 681-692, June.
  8. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  9. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
  10. Attanasio, Orazio P, et al, 1999. "Humps and Bumps in Lifetime Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 22-35, January.
  11. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
  12. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 149-185.
  13. Hans-Werner Sinn, 2000. "Germany's Economic Unification. An Assessment after Ten Years," CESifo Working Paper Series 247, CESifo Group Munich.
  14. Christopher D. Carroll & David N. Weil, 1993. "Saving and Growth: A Reinterpretation," NBER Working Papers 4470, National Bureau of Economic Research, Inc.
  15. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  16. Parker, J.A., 1997. "The Reaction of Household Consumption to Predictable Changes in Payroll Tax Rates," Working papers 9724, Wisconsin Madison - Social Systems.
  17. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc.
  18. Martin Browning & Thomas Crossley, 2001. "The life-cycle model of consumption and saving," IFS Working Papers W01/15, Institute for Fiscal Studies.
  19. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July.
  20. Biewen, Martin, 2000. "Income Inequality in Germany during the 1980s and 1990s," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(1), pages 1-19, March.
  21. Merz, Joachim & Faik, Jürgen, 1994. "Equivalence Scales Based on Revealed Preference Consumption Expenditure Microdata - The Case of West Germany," MPRA Paper 16297, University Library of Munich, Germany.
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