Aggregate Savings When Individual Income Varies

Martin Floden ()

No 591, Working Paper Series in Economics and Finance from Stockholm School of Economics

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 liquidity 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 income is stochastic, 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 demonstrate that it is mostly generated by permanent-income motives.

Keywords: equilibrium interest rate; aggregate savings; precautionary saving; infinite horizon; general equilibrium (search for similar items in EconPapers)
JEL-codes: D52 D91 E21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fmk and nep-mac
Date: 2005-03-23

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Related works:
Journal Article: Aggregate Savings When Individual Income Varies (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:hastef:0591

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