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Saving on a Rainy Day, Borrowing for a Rainy Day

  • Sule Alan

    ()

    (University of Cambridge and Koc University)

  • Thomas Crossley

    ()

    (University of Cambridge and Koc University)

  • Hamish Low

    (University of Cambridge and Institute for Fiscal Studies)

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

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1212.pdf
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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1212.

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Length: 35 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:koc:wpaper:1212
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  1. Andrew Glover & Jonathan Heathcote & Dirk Krueger & José-Víctor Ríos-Rull, 2011. "Intergenerational redistribution in the Great Recession," Working Papers 684, Federal Reserve Bank of Minneapolis.
  2. Rajashri Chakrabarti & Donghoon Lee & Wilbert van der Klaauw & Basit Zafar, 2013. "Household Debt and Saving during the 2007 Recession," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy National Bureau of Economic Research, Inc.
  3. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  4. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics; Measuring Wealth, Precautionary, and Credit Effects," IMF Working Papers 12/219, International Monetary Fund.
  5. Crossley, T. & Low, H., 2012. "Job Loss, Credit Constraints and Consumption Growth," Cambridge Working Papers in Economics 1223, Faculty of Economics, University of Cambridge.
  6. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio, 2015. "Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 21-41.
  7. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  8. Ashoka Mody & Damiano Sandri & Franziska Ohnsorge, 2012. "Precautionary Savings in the Great Recession," IMF Working Papers 12/42, International Monetary Fund.
  9. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
  10. 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.
  11. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  12. 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.
  13. Martin Browning & Thomas Crossley & Melanie Lührmann, 2012. "Durable Purchases over the Later Life Cycle," Koç University-TUSIAD Economic Research Forum Working Papers 1213, Koc University-TUSIAD Economic Research Forum.
  14. 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.
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