Author:
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Category :
Languages : en
Pages :

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Author: Chris Carroll
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 40

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Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior. This paper provides the analytical basis for those interactions. First, we explain why the introduction of a liquidity constraint increases the precautionary saving motive around levels of wealth where the constraint becomes binding. Second, we provide a rigorous basis for the oft-noted similarity between the effects of introducing uncertainty and introducing constraints, by showing that in both cases the effects spring from the concavity in the consumption function which either uncertainty or constraints can induce. We further show that consumption function concavity, once created, propagates back to consumption functions in prior periods. Finally, our most surprising result is that the introduction of additional constraints beyond the first one, or the introduction of additional risks beyond a first risk, can actually reduce the precautionary saving motive, because the new constraint or risk can hide' the effects of the preexisting constraints or risks

Author: Emilio Fernandez-Corugedo
Publisher:
ISBN:
Category : Consumer behavior
Languages : en
Pages : 38

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Author: Seung Myung Lee
Publisher:
ISBN:
Category :
Languages : en
Pages : 158

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Author: Angus Deaton
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 38

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Author: Emilio Fernández Corugedo
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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This paper considers the implications for consumption and saving behaviour when households are allowed to borrow, but face penalties which increase with the amount borrowed. It shows that the introduction of this type of constraints (soft liquidity constraints) does not lead to consumers behaving very differently from consumers who face constraints which prevent them from borrowing at any time (hard liquidity constraints). However, when hard constraints are relaxed and become soft, the amount of precautionary saving falls.

Author: Erik Hurst
Publisher:
ISBN:
Category : Business enterprises
Languages : en
Pages : 74

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In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. Since business owners hold larger amounts of wealth than other households for non-precautionary reasons and also face highly volatile income, they induce a correlation between wealth and income risk regardless of whether or not a precautionary saving motive exists. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that among both business owners and non-business owners, the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. However, pooling together the two groups leads to an artificially high estimate of the importance of precautionary savings. New data from the Survey of Consumer Finances further confirms that precautionary savings account for less than ten percent of total wealth for both business owners and non-business owners. Thus, while a precautionary saving motive exists and affects all households, it does not give rise to high amounts of wealth in the economy, particularly among those households who face the most volatile stream of income.

Author: Cristiń Echeverría
Publisher:
ISBN:
Category :
Languages : en
Pages : 202

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Author: Mark Huggett
Publisher:
ISBN:
Category : Saving and investment
Languages : en
Pages : 40

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Author: Reda Cherif
Publisher: International Monetary Fund
ISBN: 1475570694
Category : Business & Economics
Languages : en
Pages : 41

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We study the effects of permanent and temporary income shocks on precautionary saving and investment in a "store-or-sow" model of growth. High volatility of permanent shocks results in high precautionary saving in the safe asset and low investment, or a "volatility trap." Namely, big savers invest relatively little. In contrast, low volatility of permanent shocks leads to low precautionary saving and high or low investment, depending on the volatility of temporary shocks. Empirical evidence shows a nonlinear relationship between investment and saving and that investment is a hump-shaped function of the volatility of permanent shocks, as predicted by the model.