Showing papers on "Precautionary savings published in 2017"
TL;DR: In this paper, the authors use a model a la Bewly-Huggett-Ayagari to explore the eects of a credit crunch on consumer spending.
Abstract: We use a model a la Bewly-Huggett-Ayagari to explore the eects of a credit crunch on consumer spending. Households borrow and lend to smooth idiosyncratic income shocks facing an exogenous borrowing constraint. We look at the economy response after an unexpected permananent tightening of this constraint. The interest rate drops sharply in the short run and then adjusts to a lower steady state level. This is due to the fact that after the shock a large fraction of agents is far below their target holdings of precautionary savings and this generates a large temporary positive shock to net lending. We then look at the eects on output. Here two opposing forces are present, as households can deleverage in two ways: by consuming less and by working more. We show that under a reasonable parametrization the eect on consumer spending dominates and precautionary behavior generates a recession. If we add nominal rigidities two things happen: (i) supply-side responses are muted, and (ii) there is a lower bound on the interest rate adjustment. These two elements tend to amplify the recession caused by the credit tightening.
222 citations
TL;DR: This article measured financial literacy among LinkedIn members, complementing standard questions with additional questions that allow them to gauge self-perceptions of financial literacy, and found that low-literacy is associated with mistaken beliefs about financial products and less willingness to accept financial advice.
103 citations
TL;DR: In this paper, the authors used a dataset of 600 households collected through face-to-face interviews from two districts of Khyber Pakhtunkhwa province that were severely affected from 2010 floods.
Abstract: Pakistan is one of the most adversely affected countries by climate-related extreme events such as floods owing to its geographical and climatic conditions Over the last two decades, frequency and severity of flood events have been increased and has adversely affected the livelihood and well-being of millions of people in Pakistan The development of effective mitigation policies requires a clear understanding of the impacts and local responses to extreme events, which is quite limited in Pakistan This study used a dataset of 600 households collected through face-to-face interviews from two districts of Khyber Pakhtunkhwa province that were severely affected from 2010 floods The correlation and probit model methods are used to assess the study objectives The findings of the study revealed that elevated ground floor, foundation strengthening, construction of house with reinforced material and precautionary savings were the main adaptation measures adopted at household level The results from the probit model showed that gender, age, location, monthly income, family size, house ownership, disability, and education influence the households’ choices of mitigation strategies The study further indicated that adoption of mitigation strategies at household level is constrained by several factors, ie, financial constraint, lack of early warning system, lack of land use planning and inadequate resources Further mitigation strategies also varied across different groups of households based on education, age, and income Additionally the study discovered that the local policies on disaster management need to be improved to address the barriers to the adoption of advanced level adaptation measures at the household level such as advanced level early warning system, flood forecasting and dissemination of updated information and support, house building codes, infrastructure building practices, and adequate spatial planning
100 citations
TL;DR: The authors construct a monthly index of economic uncertainty for Australia and use it to assess how uncertainty affects the Australian economy and find that it reduces investment and employment growth and raises the household saving ratio consistent with the 'precautionary savings' channel.
Abstract: I construct a monthly index of economic uncertainty for Australia. Economic uncertainty rose to historically high levels during the financial crisis and remained elevated until late 2013. The index is: higher around recessions, elections, monetary policy surprises and some major events; tends to increase faster than it decreases; and is driven by both domestic and foreign factors. I use the index to assess how uncertainty affects the Australian economy. Consistent with the 'real options' channel of uncertainty, I find that it reduces investment and employment growth. Similarly, uncertainty raises the household saving ratio, consistent with the 'precautionary savings' channel. [ABSTRACT FROM AUTHOR]
94 citations
TL;DR: In this paper, the relation between the distribution of labor earnings and distribution of wealth was studied and it was shown that labor earnings alone cannot by themselves account for the large top shares in observed distributions of wealth.
Abstract: We study the relation between the distribution of labor earnings and the distribution of wealth. We show, theoretically as well as empirically, that while labor earnings and precautionary savings are important determinants of wealth inequality factors, they cannot by themselves account for the thick tail of (the large top shares in) the observed distribution of wealth. Other determinants, like stochastic returns to wealth, as well as savings rates and rates of returns increasing in wealth, need to be accounted for.
59 citations
TL;DR: This article presented an incomplete markets business cycle model in which idiosyncratic risk varies over time in accordance with these empirical findings, which give rise to a cyclical precautionary savings motive that substantially raises the volatility of aggregate consumption growth.
52 citations
TL;DR: In this article, the authors study a model where households are subject to uninsurable unemployment risk, price setting is subject to nominal rigidities, and the labor market is characterized by matching frictions and inflexible wages.
49 citations
TL;DR: In this paper, the authors highlight that accounting for the fact that tourism elasticities do not remain stable is crucial for forecasting situations and demonstrate that approaches with constant elasticity assumptions might lead to substantial forecasting failures, especially in periods characterized by major economic fluctuations and changes in the macroeconomic environment.
Abstract: This study highlights that accounting for the fact that tourism elasticities do not remain stable is crucial for forecasting situations. We demonstrate that approaches with constant elasticity assumptions might lead to substantial forecasting failures, especially in periods characterized by major economic fluctuations and changes in the macroeconomic environment. Therefore, in the course of distinct business cycles, we have to take into account that different price and income effects are to be expected. The main reasons why income elasticity may vary across the business cycle include loss aversion, liquidity constraints, and precautionary savings. By analyzing smooth transition autoregressive models and time-varying parameter approaches, we demonstrate that elasticities may vary as a result of structural changes in consumer behavior and/or policy regime shifts. Income elasticities may also change in the medium term in line with the worsening of the macroeconomic environment and indicate that tourism is no...
40 citations
TL;DR: The authors studied household savings and expenditure adjustment from an unexpected, large-scale and rapidly evolving political shock that occurred largely in May 1989 in Beijing, China using monthly micro-panel data, and found that a surge in political uncertainty resulted in significant temporary increases in savings among urban households in China.
36 citations
TL;DR: A tractable continuous-time constant-absolute-risk averse (CARA)-Gaussian framework is provided to explore how the interactions of fundamental uncertainty, model uncertainty due to a preference for robustness, and state uncertainty affect strategic consumption-portfolio rules and precautionary savings in the presence of uninsurable labor income.
Abstract: This paper provides a tractable continuous-time, constant absolute risk aversion–Gaussian framework to explore how the interactions of fundamental uncertainty, model uncertainty due to a preference for robustness, and state uncertainty due to information-processing constraints (rational inattention) affect strategic consumption–portfolio rules and precautionary savings in the presence of uninsurable labor income. Specifically, after solving the model explicitly, I compute and compare the elasticities of strategic asset allocation and precautionary savings to risk aversion, robustness, and inattention. Furthermore, for plausibly estimated and calibrated model parameters, I quantitatively analyze how the interactions of model uncertainty and state uncertainty affect the optimal share invested in the risky asset and show that they can provide a potential explanation for the observed stockholding behavior of households with different education and income levels. This paper was accepted by Neng Wang, finance.
35 citations
TL;DR: In this article, the authors construct a tractable dynamic stochastic general equilibrium model with incomplete insurance and heterogenous agents, and then estimate, by maximum likelihood, the contribution of precautionary savings to the propagation of recent recessions.
Abstract: We construct, and then estimate by maximum likelihood, a tractable dynamic stochastic general equilibrium model with incomplete insurance and heterogenous agents. The key feature of our framework is that cross‐sectional heterogeneity remains finite dimensional. The solution to the model thus admits a state‐space representation that can be used to recover the distribution of the model's parameters. Household heterogeneity expands the set of observables to cross‐sectional moments available at the business‐cycle frequency (in addition to the usual macro and monetary time series). Incomplete insurance gives rise to a precautionary motive for holding wealth that propagates aggregate shocks via (i) a stabilizing aggregate supply effect, working through the supply of capital, and (ii) a destabilizing aggregate demand effect coming from the feedback loop between unemployment risk and precautionary saving. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and, to a lesser extent, during the 1990–1991 recession. In contrast, the supply effect at least offsets the demand effect during the 2001 recession.
DSGE incomplete insurance heterogenous agents Bayesian estimation C32 E12 E21 E52
TL;DR: The authors examined the role played by government investment in infrastructure in determining the optimal quantity of public debt in a heterogeneous agent economy with incomplete insurance markets, and showed that the inclusion of infrastructure and transitional dynamics between stationary states critically affects the characterization of the optimal public debt.
Abstract: We examine the role played by government investment in infrastructure in determining the optimal quantity of public debt in a heterogeneous agent economy with incomplete insurance markets. Calibrating our model to the key aggregate and distributional moments of the U.S. economy, we show that, (i) the inclusion of infrastructure, and (ii) transitional dynamics between stationary states critically affects the characterization of the optimal level of public debt. Welfare comparisons between stationary equilibria indicate that it is optimal for the government to accumulate assets (public surplus). However, once transitional dynamics are accounted for, the optimal share of public debt turns out to be positive and close to the current level of public debt in the U.S. These contrasting results underscore a previously ignored channel through which public investment and tax policies can generate differential trade-offs for the precautionary savings motive for households in the short run and long run. Our results also indicate that the inclusion of public infrastructure in the model specification implies a lower level of optimal debt relative to the model without infrastructure, both when comparing steady states as well as accounting for transitional dynamics.
TL;DR: Van Nieuwerburgh et al. as discussed by the authors proposed a real business cycle model with external habit and capital adjustment costs, which matches a long list of asset price and business cycle moments: equity, firm value, and risk-free rate volatility; the equity premium; excess return predictability; consumption growth predictability.
Abstract: A standard real business-cycle model with external habit and capital adjustment costs matches a long list of asset price and business-cycle moments: equity, firm value, and risk-free rate volatility; the equity premium; excess return predictability; consumption growth predictability; basic moments of consumption, output, and investment; among others. The model also generates endogenous consumption volatility risk. Precautionary savings motives make consumption sensitive to shocks in bad times, leading to countercyclical volatility, even with homoscedastic technology shocks. Habit acts as countercyclical leverage, which amplifies this channel. Habit also implies high risk aversion, which amplifies the stock price response.Received April 21, 2016; editorial decision February 3, 2017 by Editor Stijn Van Nieuwerburgh.
TL;DR: In this article, the instability of tourism income elasticities in the European Union-15 since 2004 has been analyzed and it was shown that the small income improvements in the fast growth periods were used relatively more for satisfying pent-up demand for necessary consumer goods or precautionary savings than for traveling abroad.
Abstract: Accounting for the instability of tourism income elasticities in the European Union-15 since 2004, estimations show that income elasticities in the period 2004–2014 were greater in slow-growth periods (above 1) than in fast-growth periods (below 1). Due to the gradual deterioration of the economic environment since 2004, the small income improvements in the fast-growth periods were used relatively more for satisfying pent-up demand for necessary consumer goods or precautionary savings than for traveling abroad. The relatively high income elasticities in the slow-growth periods resulted from negative adjustments due to the effects of the economic downturn.
TL;DR: In this paper, the authors assess empirically whether consumer confidence indices contain information about future private consumption growth in Turkey and estimate models for quarterly total, durable, and non-durable consumption growth with and without sentiment indicators.
Abstract: In this study, we assess empirically whether consumer confidence indices contain information about future private consumption growth in Turkey. To this end, we estimate models for quarterly total, durable, and nondurable consumption growth with and without sentiment indicators. We evaluate in-sample forecasts and one-step-ahead out-of-sample forecasts from recursive ordinary least squares (OLS) estimates. We also test permanent income and precautionary savings hypotheses with our results. We use overall indices of CNBC-e and Turkstat-CBRT Surveys, and Consumer Expectations Index (CEI) and Propensity to Consume Index (PCI) from the CNBC-e Survey as sentiment measures. We show that the lagged values of consumer sentiment have explanatory power on consumption growth. However, when used in conjunction with other economic variables such as real labor income, real stock price, real interest rate, and exchange rate, only CNBC-e for total consumption, and CBRT and PCI for nondurable consumption provide in...
TL;DR: In this article, the authors investigate the enabling environment for small farmers to manage climatic risks at farm level and suggest that small farmers have significantly lower access to credit (both formal and informal), formal information sources along with significantly higher perceptions of pest and diseases.
Abstract: Agriculture sector is exposed to a variety of risks and uncertainties which can lead to sizeable losses in crop yields and alter farm incomes. Risk management is, therefore, an essential element of the overall farm management process. Farmers have number of options in managing farm risks; however, smallholders, due to their small operations and limited financial capabilities, find it difficult to adopt sophisticated risk management strategies to overcome yield and income instabilities at farm level. This study is, therefore, designed to investigate the enabling environment for small farmers to manage climatic risks at farm level. A total of 330 sampled respondents from Khyber Pakhtunkhwa Province of Pakistan are randomly selected for the study using multistage sampling technique. Analysis of variance technique is employed to compare the risk management adoption decision of small, medium and large farmers. A post hoc analysis is also performed to highlight the difference in means and the magnitude of differences. The results indicate that smallholders have significantly lower access to credit (both formal and informal), formal information sources along with significantly higher perceptions of pest and diseases. Smallholders are also at the tail end in the adoption of precautionary savings and agricultural credit to manage climatic risk at farm level. The study urges for risk management policies particularly in favor of the small farmers and intervention in the existing information and credit provision programs to facilitate smallholders in managing farm risks.
TL;DR: In this article, the authors test if precautionary behavior in consumption decisions of rural households differs across the forms of savings and find that, on average, the savings device does not matter but that the effect of income on savings indeed depends on the saving device.
TL;DR: The authors showed that the rise of the top 1 percent may have led to a large increase in desired savings and can explain a 045pp to 085pp decline in long-run real interest rates.
Abstract: There has been a large rise in US top income inequality since the 1980s We merge a widely studied model of the Pareto tail of labor incomes with a canonical model of consumption and savings to study the consequences of this increase for aggregate demand Our model suggests that the rise of the top 1 percent may have led to a large increase in desired savings and can explain a 045pp to 085pp decline in long-run real interest rates This effect arises from both a wealth effect at the top and increased precautionary savings from declines lower in the income distribution
TL;DR: In this article, a hybrid system that borrows from concepts of both unemployment insurance and unemployment accounts is studied, in which workers are mandated to save when employed and can withdraw from the account when unemployed.
Abstract: Unemployment accounts are mandatory individual savings accounts that can be used only during unemployment or retirement. Unlike unemployment insurance, unemployment accounts solve the moral hazard problem but provide no public insurance to workers. I study a hybrid system that borrows from concepts of both unemployment insurance and unemployment accounts, in which workers are mandated to save when employed and can withdraw from the account when unemployed. Once the account is exhausted, the unemployed worker receives unemployment benefits. This hybrid policy provides insurance to workers more efficiently than an unemployment insurance system because it provides government benefits selectively. As a consequence, young workers can reduce their precautionary savings and better smooth their consumption over the life cycle. Calibrating the model to the US economy, I find that, relative to an optimal unemployment insurance system, the optimal hybrid policy leads to a welfare gain of 2.4%, measured as consumption equivalent variation. JEL Classification: E24; E61; J64; J65
TL;DR: The authors showed that changes in country-specific aggregate volatility are positively correlated with current account dynamics while negatively correlated with investment, output and credit flows, and added a credit supply channel with default and lenders exposed to aggregate risk.
Abstract: Changes in country-specific aggregate volatility are positively correlated with current account dynamics while negatively correlated with investment, output and credit flows. An International Real Business Cycle model with time-varying aggregate uncertainty, through a precautionary savings channel, can account for the positive correlation but implies counterfactual comovements for the other variables. Adding a credit supply channel with default and lenders exposed to aggregate risk allows the model to match all the facts. Higher volatility contracts credit supply. The current account turns to surplus because savings increase, but also because investment collapses.
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TL;DR: In this paper, a life-cycle overlapping generations economy with uninsurable labor market risk was developed to investigate the relationship between income inequality and the impact of fiscal consolidation in European economies.
Abstract: Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data.
TL;DR: In this paper, a non-linear Interacted VAR model is used to assess whether the real effects of monetary policy shocks are milder during times of high uncertainty, i.e., the conditioning indicator discriminating “high” and “low” uncertainty states, is modeled endogenously in the VAR.
Abstract: This paper estimates a non-linear Interacted VAR model to assess whether the real effects of monetary policy shocks are milder during times of high uncertainty. In a novel way, uncertainty, i.e., the conditioning indicator discriminating “high” and “low” uncertainty states, is modeled endogenously in the VAR and is found to reduce after an expansionary shock. Generalized Impulse Response Functions a la Koop, Pesaran and Potter (1996) suggest that monetary policy shocks are significantly less powerful during uncertain times, with the peak reactions of a battery of real variables being about two-thirds milder than those during tranquil times. Among the theoretical explanations proposed by the literature, real option effects and precautionary savings appear the ones supported by our results.
TL;DR: This paper developed a simple macroeconomic model with extreme financial frictions (no credit markets) and showed that poverty traps can emerge even in the absence of leverage, where farmers produce fruit by renting land from landlords.
TL;DR: In this paper, a difference-in-differences approach was used to find that the cash holdings of firms increase significantly after announcements of irregularity-related restatements, and that the increase is larger for firms operating in the US.
Abstract: Using a difference-in-differences approach, we find that the cash holdings of firms increase significantly after announcements of irregularity-related restatements. The increase is larger for firms...
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TL;DR: The authors constructs a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth to study how the interaction between two types of uncertainty due to ignorance affects strategic consumption-portfolio rules and precautionary savings.
Abstract: This paper constructs a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth to study how the interaction between two types of uncertainty due to ignorance affects strategic consumption-portfolio rules and precautionary savings. Specifically, after solving the model explicitly, we theoretically and quantitatively explore (i) how these ignorance-induced uncertainties interact with intertemporal substitution, risk aversion, and the correlation between the equity return and labor income, and (ii) how they jointly affect strategic asset allocation, precautionary savings, and the equilibrium asset returns. Furthermore, we use data to test our model?s predictions on the relationship between ignorance and asset allocation and quantitatively show that the interaction between the two types of uncertainty is the key to explain the data. Finally, we find that the welfare costs of ignorance can be very large.
TL;DR: In this article, the effect of income uncertainty on assets held in accounts and cash was investigated, and substantial empirical evidence for precautionary savings was found. But they did not consider the impact of subjective economic uncertainty on behaviour.
Abstract: This paper estimates the effect of income uncertainty on assets held in accounts and cash, and finds substantial empirical evidence for precautionary savings. Using household-level panel data, it explicitly distinguishes between ‘real’ income uncertainty the household is actually exposed to, and ‘perceived’ income uncertainty. It finds that the latter substantially increases precautionary savings above and beyond the effect of ‘real’ income uncertainty. The effect of subjective economic uncertainty on behaviour has only begun to show up after the Great Recession. The economic crisis appears to have shifted households’ willingness to forgo current consumption for insurance purposes. Our results imply that households save above their optimal level especially after and during a crisis, potentially exacerbating the economic downturn.
TL;DR: In this paper, the authors explore the role of the universal banking system in contributing to the stock market bust in the wake of the financial crisis 2008-2009 when bankers might have incentive to hide information from shareholders.
TL;DR: In this article, the authors explore demand side factors such as an increase in idiosyncratic earnings risks and changes in housing institutions as potential explanations for the increase in the relative price of houses and consumption relative to nondurables in the United States.
Abstract: Over the past few decades, both the relative price of housing structures and housing services consumption relative to nondurables increased significantly in the United States. This paper explores demand-side factors such as an increase in idiosyncratic earnings risks and changes in housing institutions as potential explanations for the phenomenon. We build a general equilibrium incomplete markets model of housing and compare two steady states that correspond to the 1967 and 2000 U.S. economies. Our model can generate the simultaneous increase in the relative price of houses and housing services consumption relative to nondurables. We find that the increased earnings risks are crucial in replicating this pattern.
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TL;DR: This article investigated the relationship between uncertainty and economic growth in economies with different stages of development using monthly data on industrial production during the period of 1961 to 2014 from OECD's Main Economic Indicators database.
Abstract: This letter aims to investigate the relationship between uncertainty and economic growth in economies with different stages of development. We use monthly data on industrial production during the period of 1961 to 2014 from OECD's Main Economic Indicators database. We estimate the relationship between industrial production growth and its volatility from 14 countries using EGARCH in mean and panel GARCH in mean models. Our results suggest that the correlation between economic growth and its own volatility is positive in developed countries but ambiguous in emerging economies. This facts support both theories of precautionary savings, in the case of developed countries, and irreversible investments, in the case of some emerging economies.
TL;DR: The estimated results suggest that precautionary savings are the main form of assets in poor households in Vietnam and health insurance seems to be used by people in poor health, which indicates that the problem of adverse selection exits.
Abstract: Does the recent introduction of public health insurance influence households' risk-coping measures in developing countries? This study investigates risk-coping measures for health shocks using a Living Standard Measurement Survey in Vietnam where universal health coverage is aimed to be achieved. The estimated results suggest that precautionary savings are the main form of assets in poor households. Health insurance seems to be used by people in poor health, which indicates that the problem of adverse selection exits. Importantly, get well gifts in the form of money play a significant role in helping households cope with health shocks. A traditional informal insurance system still exists in close Vietnamese communities.