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Precautionary Saving Over the Business Cycle

Listed author(s):
  • Edouard Challe

    (Department of Economics, Ecole Polytechnique)

  • Xavier Ragot

    (Observatoire français des conjonctures économiques)

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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Date of creation: Feb 2016
Publication status: Published in The Economic Journal, 2016, vol. 126, pp.135-164
Handle: RePEc:spo:wpmain:info:hdl:2441/54k1p7hdq38odb1k39k1rdm8di
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