SSE/EFI Working Paper Series in Economics and Finance
Aggregate Savings When Individual Income Varies
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; (follow links to similar papers)
JEL-Codes: D52; D91; E21; (follow links to similar papers)
16 pages, March 23, 2005
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