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Precautionary Saving over the Business Cycle

  • Edouard Challe

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)

  • Xavier Ragot

    (Centre de recherche de la Banque de France - Banque de France, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA))

We study the macroeconomic implications of time-varying precautionary saving within a general equilibrium model with borrowing constraint and both aggregate shocks and uninsurable idiosyncratic unemployement risk. Our framework generates limited cross-sectional household heterogeneity as an equilibrium outcome, thereby making it possible to analyse the role of precautionary saving over the business cycle in an analytically tractable way. The time-series behaviour of aggregate consumption generated by our model is much closer to the data than that implied by the comparable hand-to-mouth and representative-agent models, and comparable to that produced by the(intractable) Krusell-Smith (1998) model.

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Paper provided by HAL in its series PSE Working Papers with number hal-00843150.

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Date of creation: 10 Jul 2013
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Handle: RePEc:hal:psewpa:hal-00843150
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