Quantifying Borrowing Constraints and Precautionary Savings

Makoto Nirei

Review of Economic Dynamics, 2006, vol. 9, issue 2, 353-363

Abstract: This paper quantifies the effects of precautionary savings. It demonstrates that Zeldes' estimate (1989) of excess consumption growth for low asset holders is consistent with a dynamic general equilibrium model with uninsurable endowment shocks when borrowing is constrained at three months' worth of average wage income. I propose a Monte Carlo simulation of the stationary equilibrium as a method of indirectly testing the hypotheses of a no-borrowing specification and a natural debt limit specification. At the estimated borrowing constraint, an increase in endowment shocks within the range of empirical findings can cause a 1.6% increase in the savings rate and a 6.9% increase in capital. (Copyright: Elsevier)

Keywords: liquidity constraint; precautionary savings; borrowing constraint; natural debt limit; excess consumption growth; uninsured endowment shock (search for similar items in EconPapers)
JEL-codes: C68 E21 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.red.2006.01.002

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