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The Response of Household Saving to the Large Shock of German Reunification

Nicola Fuchs-Schündeln
Authors registered in the RePEc Author Service: Nicola Fuchs-Schuendeln

Working Papers, Center for Retirement Research at Boston College from Center for Retirement Research

Abstract: German reunification was a large, unexpected shock for East Germans, with different economic consequences for different birth cohorts. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. In the empirical part, I derive three stylized features concerning the saving behavior of East vs. West Germans in the 1990s: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this East-West gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time. The theoretical part investigates whether a comprehensive life cycle model can predict these three features. I find strong evidence in favor of rational, forward looking saving behavior. The precautionary saving motive is essential in replicating the features from the data.

Pages: 53 pages
Date: 2008-10, Revised 2008-12
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Citations: View citations in EconPapers (30)

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