Article ID Journal Published Year Pages File Type
985713 Review of Economic Dynamics 2008 13 Pages PDF
Abstract

This paper examines aggregate savings in a general equilibrium model where infinitely lived households face volatile (and possibly uncertain) income paths, hold a risk-free asset, and face a borrowing constraint. I first show that the equilibrium capital stock in an economy without uncertainty, but where individual income varies, can be larger than in an economy where each household's income is constant. When individual income is stochastic and uninsurable, the equilibrium capital stock is always larger than when income is constant. This additional capital accumulation has sometimes been interpreted as precautionary savings, but I argue that much of the additional savings are generated by permanent-income motives in combination with strict borrowing constraints.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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