Discussion paper

DP9608 Precautionary Saving over the Business Cycle

We study the macroeconomic implications of time-varying precautionary saving within a general equilibrium model with borrowing constraint and both aggregate shocks and uninsurable idiosyncratic unemployement risk. Our framework generates limited cross-sectional household heterogeneity as an equilibrium outcome, thereby making it possible to analyse the role of precautionary saving over the business cycle in an analytically tractable way. The time-series behaviour of aggregate consumption generated by our model is much closer to the data than that implied by the comparable hand-to-mouth and representative-agent models, and comparable to that produced by the (intractable) Krusell-Smith (1998) model.


Ragot, X and E Challe (2013), ‘DP9608 Precautionary Saving over the Business Cycle‘, CEPR Discussion Paper No. 9608. CEPR Press, Paris & London. https://cepr.org/publications/dp9608