Precautionary saving and aggregate demand

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 statespace representation that can be used to recover the distribution of the model's parameters. Household heterogeneity expands the set of observables to crosssectional moments available at the business-cycle frequency (in addition to the Edouard Quantitative Economics 8 (2017) 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.

Macroeconomics and Household Heterogeneity

“…33 Next we translate these estimates into a quarterly persistence and variance. 34 We then use the Rouwenhorst procedure to discretize the persistent part of the process into a seven-state Markov chain. 35 The iid shock only enters the computation of the expectation on the right-hand side of the Euler equation.…”

“…For the model with preference heterogeneity, we assume that households at the beginning of their life draw their permanent discount factor β from a uniform distribu- 33 For the exact definition of the labor earnings after taxes, sample selection criteria and estimation method, please see appendix A. 34 In order to ensure that quarterly log-earnings has the same persistence as annual log-earnings, we choose the persistence of the quarterly AR(1) to be φ =φ 1 4 . For the variances, we note that the main purpose of the earnings shocks is to help deliver a plausible cross-sectional distribution of labor income.…”

Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy

“…Little work exists that links heterogeneity and labor-market frictions. An exception is Challe et al (2013), who assume that all employed households join representative families. Upon entering unemployment, however, households leave the family with their share of the family's wealth.…”

L’étude des fluctuations macroéconomiques est-elle « scientifique » ?

“…Enfin, et c'est peut-être là le plus important, les ménages doivent être imparfaitement assurés contre le risque de chômage -sans quoi il n'y aurait pas de motif de précau-tion et donc pas d'épargne de précaution variable dans le temps. Ces trois mécanismes sont présents sous diverses formes, et donc engendrent la spirale de l'épargne de précaution, dans les travaux de Challe et al (2017), Chamley (2014), Den Haan et al (2017), Heathcote et Perri (2017), Ravn et Sterk (2017) et Werning (2015.…”