Open AccessPrecautionary Saving Over the Business Cycle
Author(s) -
Challe Edouard,
Ragot Xavier
Publication year - 2016
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/ecoj.12189
Subject(s) - precautionary savings , economics , business cycle , consumption (sociology) , unemployment , general equilibrium theory , aggregate (composite) , outcome (game theory) , systematic risk , econometrics , microeconomics , macroeconomics , market liquidity , social science , materials science , sociology , composite material
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.