Showing papers on "Precautionary savings published in 2006"
TL;DR: This paper found that increases in income risk significantly raises both the propensity and the proportion of labor earnings sent home for family-provided insurance and for self-insurance, and used a novel approach to test for the insurance motive by relating host economy risk levels to remittance flows.
Abstract: We argue that remittances are, in part, transferred to the home country to purchase family-provided insurance and self-insurance. We use data on Mexican immigrants with work experience in the United States to capture the motives for sending remittances and use a novel approach to test for the insurance motive by relating host economy risk levels to remittance flows. We find that increases in income risk significantly raises both the propensity and the proportion of labor earnings sent home for family-provided insurance and for self-insurance.
383 citations
TL;DR: In this paper, a structural life-cycle model of consumption, labour supply and job mobility in an economy with search frictions is proposed to distinguish between different sources of risk and to estimate their effects.
Abstract: We specify a structural life-cycle model of consumption, labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects. The sources of risk are shocks to productivity, job destruction, the process of job arrival when employed and unemployed and match level heterogeneity. Our model allows for four main social insurance programmes. In contrast to simpler models that attribute all income fluctuations to shocks, our framework allows us to disentangle the effects of the shocks from the responses to these shocks. Estimates of productivity risk, once we control for employment risk and for individual labour supply choices, are substantially lower than estimates that attribute all wage variation to productivity risk. Increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving. Increases in employment risk have large effects on output and, primarily through this channel, affect welfare. The welfare value of government programs such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides (partial) insurance against employment risk and no insurance against persistent shocks.
245 citations
TL;DR: In this paper, the authors quantified the macroeconomic implications of the lack of insurance against idiosyncratic labor market risk and showed that households make ample use of work effort as a consumption smoothing mechanism.
123 citations
TL;DR: In this article, the authors introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets, where each agent is an entrepreneur operating her own technology with her own capital stock.
119 citations
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TL;DR: In this article, the authors argue that an external imbalance is a natural consequence of the great moderation, and that a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance.
Abstract: The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the great moderation) and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.
110 citations
TL;DR: In this article, the influence of past behavior on access to transfers and wealth-differentiated transfer behavior was analyzed in informal risk sharing institutions involving inter-household transfers, and the findings indicated that livestock transfers are of limited effectiveness in addressing asset risk and avoiding poverty.
82 citations
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TL;DR: In this article, the authors argue that an external imbalance is a natural consequence of the great moderation of the early 1980s and the large and persistent US external imbalance, and they consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against.
Abstract: The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the “great moderation”) and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.
61 citations
TL;DR: In this paper, the conditional variance of changes in income increases with its level, and the authors show that a larger realization of income not only implies a higher level of human wealth, but also signals a riskier stream of future labor income, inducing a higher precautionary saving, and thus giving rise to Friedman's conjecture.
53 citations
TL;DR: In this article, a general-equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk is presented. But this model is restricted to a single class of agents.
48 citations
TL;DR: In this paper, the authors argue that an external imbalance is a natural consequence of the great moderation and that a fall in business cycle volatility like that observed in the United States can account for about 20 percent of the actual U.S external imbalance.
Abstract: The early 1980s marked the onset of two striking features of the current world macroeconomy: the fall in U.S. business cycle volatility (the “great moderation”) and the large and persistent U.S. external imbalance. In this paper, we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its incentives to accumulate precautionary savings fall and this results in a permanent deterioration of its external balance. To assess how much of the current U.S. imbalance can be explained by this channel, we consider a standard two-country business cycle model in which households are subject to business cycle shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like that observed in the United States can account for about 20 percent of the actual U.S. external imbalance.
48 citations
TL;DR: In this article, an explicitly solved model for the distribution of wealth and income in an incomplete-markets economy is presented, which captures stochastic precautionary saving motive and generates stationary wealth accumlation.
Abstract: I present an explicitly solved model for the distribution of wealth and income in an incomplete-markets economy. I first propose a consumption model with an inter-temporally dependent preference (Uzawa (1968) and Obstfeld (1990)). I then derive an analytical consumption rule which captures stochastic precautionary saving motive and generates stationary wealth accumlation. Finally, I provide a complete characterization for the equilibrium cross-selectional distribution of wealth and income in closed form by developing a recursive formulation for the moments of the distribution of wealth and income. Using this recursive formulation, I show that income persistence and the degree of wealth mean reversion are the main determinants of wealth-income correlation and relative dispersions of wealth to income, such as skewness and kurtosis ratios between wealth and income.
TL;DR: The authors derived a closed-form equilibrium relationship between consumption and wealth, one that holds along a balanced growth path in a stochastic Romer endogenous growth model, and disentangled the coefficient of relative risk aversion from the intertemporal elasticity of substitution.
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TL;DR: In this paper, the authors use a general equilibrium model of the world economy and a regional economic growth model to assess the economic implications of vulnerability from extreme meteorological events, induced by the climate change.
Abstract: We use a general equilibrium model of the world economy, and a regional economic growth model, to assess the economic implications of vulnerability from extreme meteorological events, induced by the climate change. In particular, we first consider the impact of climate change on ENSO and NAO oceanic oscillations and, subsequently, the implied variation on regional expected damages. We found that expected damages from extreme events are increasing in the United States, Europe and Russia, and Russia, and decreasing in energy exporting countries. Two economic implications are taken into account: (1) short-term impacts, due to changes in the demand structure, generated by higher/lower precautionary saving, and (2) variations in regional economic growth paths. We found that indirect short-term effects (variations in savings due to higher or lower likelihood of natural disasters) can have an impact on regional economics, whose order of magnitude is comparable to the one of direct damages. On the other hand, we highlight that higher vulnerability from extreme events translates into higher volatility in the economic growth path, and vice versa.
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TL;DR: In this article, the authors exploit the unique design of an aid program's experimental trial to identify its indirect effect on consumption for non-eligible households living in treated areas, and find that this effect is positive, and that it occurs through changes in the insurance and credit markets.
Abstract: Aid programs in developing countries are likely to affect all households living in the treated areas, both eligible and non-eligible ones. Studies that focus on the treatment effect on the treated may fail to capture important spillover effects. We exploit the unique design of an aid program's experimental trial to identify its indirect effect on consumption for non-eligible households living in treated areas. We find that this effect is positive, and that it occurs through changes in the insurance and credit markets: non-eligible households receive more transfers, and borrow more when hit by a negative idiosyncratic shock, because of the program liquidity injection, thus they can reduce their precautionary savings. We also test for general equilibrium effects in the local labor and goods markets, finding no significant changes in labor income and prices, while there is a reduction in earnings from sales of agricultural products, which are now consumed. We show that this class of aid programs has important positive externalities, thus their overall effect is larger than the effect on the treated. Our results confirm that a key identifying assumption – that the treatment has no effect on the non-treated – is likely to be violated in similar policy designs.
01 Apr 2006
TL;DR: In this paper, the authors exploit the unique design of an aid program's experimental trial to identify its indirect effect on consumption for non-eligible households living in treated areas, and find that this effect is positive, and that itoccurs through changes in the insurance and credit markets: non eligible households receive more transfers, and borrow more when hit by a negative idiosyncratic shock, because of the program liquidity injection; thus they can reduce their precautionary savings.
Abstract: Aid programs in developing countries are likely to affect both the treated and the non-treated households living in the targeted areas. Studies that focus on the treatment effecton the treated may fail to capture important spillover effects. We exploit the unique designof an aid program's experimental trial to identify its indirect effect on consumption for non-eligible households living in treated areas. We find that this effect is positive, and that itoccurs through changes in the insurance and credit markets: non-eligible households receivemore transfers, and borrow more when hit by a negative idiosyncratic shock, because of theprogram liquidity injection; thus they can reduce their precautionary savings. We also testfor general equilibrium effects in the local labor and goods markets; we find no significantchanges in labor income and prices, while there is a reduction in earnings from sales ofagricultural products, which are now consumed rather than sold. We show that this classof aid programs has important positive externalities; thus their overall effect is larger thanthe effect on the treated. Our results confirm that a key identifying assumption - that thetreatment has no effect on the non-treated - is likely to be violated in similar policy designs. Aid programs in developing countries are likely to affect both the treated and the non-treated households living in the targeted areas. Studies that focus on the treatment effecton the treated may fail to capture important spillover effects. We exploit the unique designof an aid program's experimental trial to identify its indirect effect on consumption for non-eligible households living in treated areas. We find that this effect is positive, and that itoccurs through changes in the insurance and credit markets: non-eligible households receivemore transfers, and borrow more when hit by a negative idiosyncratic shock, because of theprogram liquidity injection; thus they can reduce their precautionary savings. We also testfor general equilibrium effects in the local labor and goods markets; we find no significantchanges in labor income and prices, while there is a reduction in earnings from sales ofagricultural products, which are now consumed rather than sold. We show that this classof aid programs has important positive externalities; thus their overall effect is larger thanthe effect on the treated. Our results confirm that a key identifying assumption - that thetreatment has no effect on the non-treated - is likely to be violated in similar policy designs.
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TL;DR: In this article, the authors present estimates of wealth effects on consumer spending using the first wave of a new survey of household finances (EFF 2002) that contains direct measures of asset holdings and consumption.
Abstract: This paper presents estimates of wealth effects on consumer spending using the first wave of a new survey of household finances (EFF 2002) that contains direct measures of asset holdings and consumption. A distinguishing feature of the EFF is the availability of such information from a representative sample subject to stratification by wealth. Furthermore we believe we are able to measure wealth effects due to precautionary motives only. This is confirmed by the estimated pattern of wealth effects across age groups. To control for the potential endogeneity of housing wealth, we exploit geographical house price variation and inheritance information in the EFF as instrumental variables. We focus on the effects of housing wealth, distinguishing between main and secondary housing, but also report OLS estimates of financial wealth effects. We find large and statistically significant housing wealth effects for prime age households. Overall, the largest wealth effects are for owner occupied housing, followed by secondary housing, with financial wealth effects being smaller and insignificant.
TL;DR: In this article, two key issues are examined in an integrated framework: the emergence of global imbalances and the precautionary motive for accumulating reserves, which can generate substantial "global imbalance", especially if there is an inefficient supply of global insurance.
Abstract: Two key issues are examined in an integrated framework: the emergence of global imbalances and the precautionary motive for accumulating reserves. Standard models of general equilibrium would predict modest current account surpluses in the emerging markets if they face higher risk than the US itself. But, with pronounced Loss Aversion in Emerging Markets, their precautionary savings can generate substantial ‘global imbalances’, especially if there is an inefficient supply of global ‘insurance’. A combination of fear and market failure generates imbalances as a general equilibrium outcome. In principle, lower real interest rates will ensure aggregate demand equals supply at a global level: but disequilibrium may result if the required real interest rate is negative. A precautionary savings glut appears to us to be a temporary phenomenon, however, destined for correction as and when adequate reserve levels are achieved. If the process of correction is triggered by ‘Sudden Stop’ on capital flows to the US, might this not lead to 'hard landing' that is forecast by several leading macroeconomists? When precautionary saving is combined with financial panic, history offers no guarantee of full employment.
TL;DR: In this paper, the authors make an in-depth investigation on the phenomenon of high savings rate in the rural economy of China between 1978 and 2003 and construct a model incorporating the risks, liquidity constrains, and aging population to explain the existence of high saving rate.
Abstract: This paper makes an in-depth investigation on the phenomenon of high savings rate in the rural economy of China between 1978 and 2003. On the basis of precautionary savings theory, we construct a model incorporating the risks, liquidity constrains, and aging population to explain the existence of high savings rate in the rural economy of China. We measure risks with Gini coefficient and marginal propensity to save. We find that these risk indices are positively associated with the higher savings rate and the higher degree of prudence of rural households. Our findings pose an urgency of the reform of rural financial system and the improvement in social security system in the rural economy of China.
TL;DR: In this article, the authors identify households that will divorce or separate in 5 years and determine whether these households maintain greater wealth holdings in anticipation of divorce, and find that when spouses earn comparable incomes, divorce-prone households have significantly higher wealth levels (p <.01) than households that remain married.
Abstract: According to precautionary savings theory, households tend to save more when future income is less certain. Divorce often results in reduced levels of household income and individual consumption comparable to other potential income shocks. Households that will divorce or separate in 5 years are identified from the Panel Study of Income Dynamics (1994–1999) to determine whether these households maintain greater wealth holdings in anticipation of divorce. When spouses earn comparable incomes, divorce-prone households have significantly higher wealth levels (p < .01) than households that remain married. When there is a higher-earning spouse, households have significantly lower wealth levels (p < .01) than households that remain married. Results suggest that spouses with comparable earnings treat divorce as a wealth shock, whereas higher-earning spouses rationally dissave when divorce is imminent. Equitable wealth allocation for lower-earning spouses may require a more detailed investigation of predivorce wealth changes.
TL;DR: This paper examined the extent to which precautionary savings behavior can explain rapid consumption growth in an environment with high levels of savings and found evidence for a strong precautionary motive in Taiwan, with levels of prudence much higher than found in the United States and United Kingdom.
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01 Jan 2006
TL;DR: Gourinchas as discussed by the authors is an Assistant Professor of Economics at the University of California, Berkeley and his main lines of research are on precautionary savings and international financial integration, and he is the author of this paper.
Abstract: Pierre-Olivier Gourinchas is Assistant Professor of Economics at the University of California, Berkeley. His main lines of research are on precautionary savings and international financial integration.
TL;DR: In this article, the authors quantified the effects of precautionary savings and showed that an increase in endowment shocks within the range of empirical findings can cause a 1.6% increase in the savings rate and a 6.9% increase of capital.
TL;DR: In this article, the authors examine the theory of credit as a means of raising the productivity and living standards of producer households who face significant uncertainty and find that while credit has important short and medium run benefits for productivity, consumption, and lifetime utility, these benefits are not sustained in the long run.
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TL;DR: In this article, the authors show the pivotal role business owners play in estimating the importance of the precautionary saving motive and show that the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth.
Abstract: In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. The fact that business owners hold higher-than-average wealth while facing higher income risk than other households leads to a correlation between wealth and labor income risk regardless of whether or not a precautionary motive is important. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that within separate samples of 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 these two groups leads to an artificially high estimate of the importance of precautionary savings. 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 labor earnings.
TL;DR: In this article, the authors use a general equilibrium model of the world economy and a regional economic growth model to assess the economic implications of vulnerability from extreme meteorological events, induced by the climate change.
Abstract: We use a general equilibrium model of the world economy, and a regional economic growth model, to assess the economic implications of vulnerability from extreme meteorological events, induced by the climate change. In particular, we first consider the impact of climate change on ENSO and NAO oceanic oscillations and, subsequently, the implied variation on regional expected damages. We found that expected damages from extreme events are increasing in the United States, Europe and Russia, and Russia, and decreasing in energy exporting countries. Two economic implications are taken into account: (1) short-term impacts, due to changes in the demand structure, generated by higher/lower precautionary saving, and (2) variations in regional economic growth paths. We found that indirect short-term effects (variations in savings due to higher or lower likelihood of natural disasters) can have an impact on regional economics, whose order of magnitude is comparable to the one of direct damages. On the other hand, we highlight that higher vulnerability from extreme events translates into higher volatility in the economic growth path, and vice versa.
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01 Jan 2006
TL;DR: In this article, an equilibrium model of on-the-job search, augmented to account for saving decisions of workers, provides a direct and intuitive link between the empirical earnings and wealth distributions.
Abstract: In this paper, I develop and estimate a model of the labor market that can account for both the inequality in earnings and the much larger inequality in wealth observed in the data. I show that an equilibrium model of on-the-job search, augmented to account for saving decisions of workers, provides a direct and intuitive link between the empirical earnings and wealth distributions. The mechanism that generates the high degree of wealth inequality in the model is the dynamic of the ``wage ladder'' resulting from the search process. There is an important asymmetry between the incremental wage increases generated by on-the-job search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). This feature of the model generates differential savings behavior at different points in the earnings distribution. The wage growth expected by low wage workers, combined with the fact that their earnings are not much higher than unemployment benefits, causes them to dis-save. As a worker's wage increases, the incentive to save increases: the potential for wage growth declines and it becomes increasingly important to insure against the large income reduction associated with job loss. The fact that high wage and low wage workers have such different savings behavior generates an equilibrium wealth distribution that is much more unequal than the equilibrium wage distribution. I estimate the structural parameters of the model by simulation-based methods using the 1979 youth cohort of the NLSY. The estimates indicate that the micro-level search and savings behavior---estimated from the dynamics of individuals' labor market histories and wealth accumulation decisions---aggregates to replicate the cross-sectional inequality in earnings and wealth for this cohort.
01 Jan 2006
TL;DR: In this paper, the authors derived three stylized features concerning the saving behavior of East vs. West Germans: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this east-west gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time.
Abstract: German reunification was a large, unexpected income shock for East Germans, and led to an exogenous variation in the gap that different birth cohorts of East Germans faced between their actual and optimal wealth holdings. Based on this shock, this paper tests different life cycle consumption and saving theories. In the first part, I derive three stylized features concerning the saving behavior of East vs. West Germans: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this east-west gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time. In the second part, I analyze which consumption theories can reproduce these three stylized facts. I find strong evidence in favor of the precautionary savings model.
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TL;DR: In this article, the authors investigated the age dependence of idiosyncratic income risks and the importance of age dependecne for the evolution of inequalities in consumption using Japanese micro data and showed that the nonlinearity in the income process is crucial for understanding the evolution in consumption inequalities over age.
Abstract: In an economy with a seniority wage system, elderly workers are subject to greater income risks when they lose their jobs than young workers are. This paper investigates: (1) whether we can observe the age dependence of idiosyncratic income risks; and (2) the importance of age dependecne for the evolution of inequalities in consumption using Japanese micro data. Our estimation of the income process demonstrates a strong age dependence of income risks; at the age of 48, the variance of permanent income shocks begins to increase, which creates a nonlinear age?variance profile of income. This paper also uses structural estimation of a precautionary savings life cycle model to demonstrate that the nonlinearity in the income process is crucial for understanding the evolution of the consumption inequalities over age.
01 Dec 2006
TL;DR: In this article, an equilibrium model of on-the-job search, augmented to account for saving decisions of workers, provides a direct and intuitive link between the empirical earnings and wealth distributions.
Abstract: In this paper, I develop and estimate a model of the labor market that can account for both the inequality in earnings and the much larger inequality in wealth observed in the data. I show that an equilibrium model of on-the-job search, augmented to account for saving decisions of workers, provides a direct and intuitive link between the empirical earnings and wealth distributions. The mechanism that generates the high degree of wealth inequality in the model is the dynamic of the ``wage ladder'' resulting from the search process. There is an important asymmetry between the incremental wage increases generated by on-the-job search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). This feature of the model generates differential savings behavior at different points in the earnings distribution. The wage growth expected by low wage workers, combined with the fact that their earnings are not much higher than unemployment benefits, causes them to dis-save. As a worker's wage increases, the incentive to save increases: the potential for wage growth declines and it becomes increasingly important to insure against the large income reduction associated with job loss. The fact that high wage and low wage workers have such different savings behavior generates an equilibrium wealth distribution that is much more unequal than the equilibrium wage distribution. I estimate the structural parameters of the model by simulation-based methods using the 1979 youth cohort of the NLSY. The estimates indicate that the micro-level search and savings behavior---estimated from the dynamics of individuals' labor market histories and wealth accumulation decisions---aggregates to replicate the cross-sectional inequality in earnings and wealth for this cohort.
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TL;DR: In this paper, the authors present estimates of wealth effects on consumer spending using the first wave of a new survey of household finances (EFF 2002) that contains direct measures of asset holdings and consumption.
Abstract: This paper presents estimates of wealth effects on consumer spending using the first wave of a new survey of household finances (EFF 2002) that contains direct measures of asset holdings and consumption. A distinguishing feature of the EFF is the availability of such information from a representative sample subject to stratification by wealth. Furthermore we believe we are able to measure wealth effects due to precautionary motives only. This is confirmed by the estimated pattern of wealth effects across age groups. To control for the potential endogeneity of housing wealth, we exploit geographical house price variation and inheritance information in the EFF as instrumental variables. We focus on the effects of housing wealth, distinguishing between main and secondary housing, but also report OLS estimates of financial wealth effects. We find large and statistically significant housing wealth effects for prime age households. Overall, the largest wealth effects are for owner occupied housing, followed by secondary housing, with financial wealth effects being smaller and insignificant.