Precautionary Saving over the Business Cycle

Edouard Challe (1, 2) , Xavier Ragot (3, 4, 5)

1 X-DEP-ECO - Département d'Économie de l'École Polytechnique
2 CREST - Centre de Recherche en Économie et Statistique
3 Centre de recherche de la Banque de France
4 PSE - Paris School of Economics
5 PSE - Paris-Jourdan Sciences Economiques

We study the macroeconomic implications of time-varying precautionary saving within a general equilibrium model with borrowing constraint and both aggregate shocks and uninsurable idiosyncratic unemployement 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 much closer to the data than that implied by the comparable hand-to-mouth and representative-agent models, and comparable to that produced by the(intractable) Krusell-Smith (1998) model.

Domaines: Economies et finances

Edouard Challe, Xavier Ragot. Precautionary Saving over the Business Cycle. 2013. ⟨hal-00843150⟩