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Precautionary Saving Over the Business Cycle

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  • Edouard Challe
  • Xavier Ragot

    (Observatoire français des conjonctures économiques)

Abstract

We study the macroeconomic implications of time-varying precautionary savings within a general equilibrium model with borrowing constraints, aggregate shocks and uninsurable idiosyncratic unemployment risk. Our framework generates limited cross-sectional household heterogeneity as an equilibrium outcome, thereby making it possible to analyse the role of precautionary saving over the business cycle in an analytically tractable way. The time-series behaviour of aggregate consumption generated by our model is closer to the data than that implied by the hand-to-mouth and representative-agent models, and it is comparable to that produced by the Krusell and Smith (1998) model.

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  • Edouard Challe & Xavier Ragot, 2016. "Precautionary Saving Over the Business Cycle," Sciences Po publications info:hdl:2441/54k1p7hdq38, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/54k1p7hdq38odb1k39k1rdm8di
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    Keywords

    Business cycle shocks; Households; Precautionary saving;
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