Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe argue that the U.S. personal saving rate's long stability (from the 1960s through the early 1980s), subsequent steady decline (1980s2007), and recent substantial increase (20082011) can all be interpreted using a parsimonious`buer stock' model of optimal consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is aected by the gap between`target' and actual wealth, with the target wealth determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the saving rate's long-term decline, while uctuations in net wealth and uncertainty capture the bulk of the business-cycle variation. 1 Non-technical SummaryThe remarkable rise in personal saving during the Great Recession has sparked fresh interest in the determinants of saving decisions. In the United States, for example, the increase in household saving since 2007 was generally sharper than after any other postwar recession, and the personal saving rate has remained well above its pre-crisis value for the past ve years. While the saving rise partly reected a decline in spending on durable goods, spending on nondurables and services was also unprecedentedly weak.Carroll ( This paper aims to quantify these three channels, both over the long span of historical experience and for the period since the beginning of the Great Recession.To x ideas, the paper begins by presenting a tractable`buer stock' saving model with explicit and transparent roles for each of the inuences emphasized above (the precautionary, wealth, and credit channels). The model's key intuition is that, in the presence of income uncertainty, optimizing households have a target wealth ratio that depends on the usual theoretical considerations (risk aversion, time preference, expected income growth, etc), and on two features that have been harder to incorporate into analytical models:The degree of labor income uncertainty and the availability of credit. Our model yields a tractable analytical solution that can be used to calibrate how much saving should go up in response to an increase in uncertainty, or a negative shock to wealth, or a tightening of liquidity constraints.We highlight one particularly interesting implication of the model: In response to a permanent worsening in economic circumstances (such as a permanent increase in unemployment risk), consu...

Did US Consumers 'Save for a Rainy Day' Before the Great Recession?

“…While their results suggest that all three channels are important, they find that the largest contributor to the recent increase in the savings rate is the drop in household wealth. Our findings are consistent with the view in Carrol et al (2012) and Mian et al (2013).…”

“…This is consistent with the view that the fall in house prices during the subprime crisis led to increased saving by US consumers to counteract the negative impact on their accumulated wealth of the housing crash, i.e. that there are sizeable housing wealth effects on consumption, see also Carrol et al (2012) and Mian et al (2013).…”

“…Consistent with this view, Mian et al (2013) estimate a sizeable marginal propensity to consume out of housing net worth using US zip code level data for the 2006-2009 period. In a recent paper, Carrol et al (2012) investigate the relative importance of credit conditions, precautionary saving and 4 the wealth channel in explaining US savings rate dynamics. While their results suggest that all three channels are important, they find that the largest contributor to the recent increase in the savings rate is the drop in household wealth.…”

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“…This in part manifested in greater public acceptance of buying on credit. After "waves of financial innovation" began in the 1980s, "total consumer credit card debt rose from $211 billion to $876 billion" between 1989 and 2006, and "the proportion of indebted households carrying over $10,000 in credit card debt rose from 3% to 27%," leading the savings rate in the U.S. to enter a "30-year decline" (Oxford Economics 2014; see also Carroll et al 2012;Sweet et al 2013).…”

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“…8 In this case, I assume that the real wage cannot decrease below a certain level, w t , because of the existence of wage norms or imperfections in the labour market, and, hence, the prevailing wage is given by…”