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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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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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