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Precautionary Saving over the Business Cycle

  • Xavier Ragot

    (Banque de France & PSE)

  • Edouard Challe

    (Ecole Polytechnique & Banque de France)

In this paper, we present a tractable model of time-varying precautionary saving behaviour due to changes in uninsured unemployment risk. In our model, agents facing incomplete markets and borrowing constraints respond to changes in labour market conditions by altering their buffer stock of precautionary wealth, with a direct impact on current consumption. The model is calibrated to match the evidence on the share of permanent income consumers and the distribution of wealth in the U.S. economy. We find a large, but relatively short-lived, impact of the precautionary motive on aggregate consumption in response to a typical labour market shock. The implications of the precautionary motive for consumption Euler equation tests are also discussed.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 517.

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Date of creation: 2011
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Handle: RePEc:red:sed011:517
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  1. repec:hal:wpaper:halshs-00587679 is not listed on IDEAS
  2. Challe, Edouard & Le Grand, François & Ragot, Xavier, 2013. "Incomplete markets, liquidation risk, and the term structure of interest rates," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2483-2519.
  3. Challe, E. & Ragot, X., 2010. "Fiscal Policy in a Tractable Liquidity-Constrained Economy," Working papers 297, Banque de France.
  4. Makoto Nakajima, 2010. "Business cycles in the equilibrium model of labor market search and self-insurance," Working Papers 10-24, Federal Reserve Bank of Philadelphia.
  5. Steven J. Davis & R. Jason Faberman & John C. Haltiwanger, 2009. "The establishment-level behavior of vacancies and hiring," Working Papers 09-14, Federal Reserve Bank of Philadelphia.
  6. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
  7. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1477-1507.
  8. Christopher D. Carroll & Patrick Toche, 2009. "A Tractable Model of Buffer Stock Saving," NBER Working Papers 15265, National Bureau of Economic Research, Inc.
  9. Jonathan Parker & Bruce Preston, 2002. "Precautionary Saving and Consumption Fluctuations," NBER Working Papers 9196, National Bureau of Economic Research, Inc.
  10. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  11. Flacco, Paul R & Parker, Randall E, 1992. "Income Uncertainty and the Onset of the Great Depression," Economic Inquiry, Western Economic Association International, vol. 30(1), pages 154-71, January.
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