Aggregate Savings When Individual Income Varies

Martin Flodén

Review of Economic Dynamics, 2008, vol. 11, issue 1, 70-82

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. (Copyright: Elsevier)

Keywords: Equilibrium interest rate; Aggregate savings; Precautionary saving; Infinite horizon; General equilibrium (search for similar items in EconPapers)
JEL-codes: D52 D90 E21 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (4)

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DOI: 10.1016/j.red.2007.06.003

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