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Precautionary Saving Unfettered

Author

Listed:
  • James Feigenbaum

    () (University of Pittsburgh)

Abstract

Precautionary saving has engendered much interest, both because of the possibility that it can explain why, contrary to the basic Lifecycle/Permanent-Income Hypothesis, consumption roughly tracks income over the lifecycle and because of speculation that precautionary saving might account for a large fraction of aggregate saving. However, recent findings have indicated that the effects of precautionary saving are much less significant than was first thought. Early researchers did not take into account general equilibrium effects. Furthermore, most research into precautionary saving has employed buffer-stock saving models that also incorporate a borrowing constraint (either imposed exogenously or resulting endogenously from assumptions about the income process). After separating out the effects of uncertainty from the effects of the borrowing constraint, one finds that most buffer-stock saving can be accounted for by the borrowing constraint. However, buffer-stock models make the simple but unrealistic assumption that absolutely no borrowing can occur. While it has generally been assumed that borrowing constraints and precautionary saving are complementary, when these two frictions operate simultaneously a tight no-borrowing constraint will dominate. Here, we show that when borrowing is unconstrained, precautionary saving can, indeed, have significant effects. Moreover, a general equilibrium model of precautionary saving and unconstrained borrowing can better explain the lifecycle consumption profile than the corresponding buffer-stock saving model

Suggested Citation

  • James Feigenbaum, 2006. "Precautionary Saving Unfettered," Computing in Economics and Finance 2006 29, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:29
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    Cited by:

    1. repec:pit:wpaper:360 is not listed on IDEAS
    2. Nathalie Mathieu-Bolh, 2011. "Optimal taxation and borrowing constraints," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 36(31), pages 9-53, January-j.
    3. Feigenbaum James A. & Li Geng, 2012. "Life Cycle Dynamics of Income Uncertainty and Consumption," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-49, May.
    4. Francis, Johanna L., 2009. "Wealth and the capitalist spirit," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 394-408, September.
    5. repec:pit:wpaper:359 is not listed on IDEAS
    6. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(4), pages 487-513, August.
    7. Geng Li & James Feigenbaum, 2009. "A Nonparametric Characterization of Income Uncertainty over the Lifecycle," 2009 Meeting Papers 464, Society for Economic Dynamics.

    More about this item

    Keywords

    precautionary saving; lifecycle consumption; borrowing constraints;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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