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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. 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.
  2. Krusell, Per & Mukoyama, Toshihiko & Sahin, Aysegul, 2009. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," CEPR Discussion Papers 7429, C.E.P.R. Discussion Papers.
  3. repec:hal:wpaper:halshs-00587679 is not listed on IDEAS
  4. 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.
  5. Challe, E. & Le Grand, F. & Ragot, X., 2010. "Incomplete markets, liquidation risk, and the term structure of interest rates," Working papers 301, Banque de France.
  6. Challe, E. & Ragot, X., 2010. "Fiscal Policy in a Tractable Liquidity-Constrained Economy," Working papers 297, Banque de France.
  7. Steven J. Davis & R. Jason Faberman & John C. Haltiwanger, 2013. "The Establishment-Level Behavior of Vacancies and Hiring," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 581-622.
  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 A. Parker & Bruce Preston, 2004. "Precautionary Saving and Consumption Fluctuations," Working Papers 140, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  10. Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, 05.
  11. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
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