Precautionary Saving and Aggregate Demand

49 Pages Posted: 21 Jan 2015

See all articles by Edouard Challe

Edouard Challe

Ecole Polytechnique

Julien Matheron

Banque de France

Xavier Ragot

National Center for Scientific Research (CNRS)

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Date Written: January 2015

Abstract

We formulate and estimate a tractable macroeconomic model with time-varying precautionary savings. We argue that the latter affect aggregate fluctuations via two main channels: a stabilizing aggregate supply effect working through the supply of capital; and a destabilizing aggregate demand effect generated by a feedback loop between unemployment risk and consumption demand. 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 the 1990-1991 recession. In contrast, the supply effect at least offset the demand effect during the 2001 recession.

Keywords: Incomplete markets, DSGE model, Bayesian estimation, Great Recession

JEL Classification: E32

Suggested Citation

Challe, Edouard and Matheron, Julien and Ragot, Xavier and Rubio-Ramirez, Juan Francisco, Precautionary Saving and Aggregate Demand (January 2015). Banque de France Working Paper No. 535, Available at SSRN: https://ssrn.com/abstract=2552517 or http://dx.doi.org/10.2139/ssrn.2552517

Edouard Challe

Ecole Polytechnique ( email )

Ecole Polytechnique
Department of Economics
Paris, 75005
France

Julien Matheron (Contact Author)

Banque de France ( email )

Paris
France

Xavier Ragot

National Center for Scientific Research (CNRS)

3, rue Michel-Ange
Paris cedex 16, 75794
France

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8057 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.econ.umn.edu/~rubio

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