Aggregate savings when individual income varies

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 591

Classification and Topics

• Classification: Wirtschaft ; Incomplete Markets ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Macroeconomics: Consumption; Saving; Wealth
• Subject: equilibrium interest rate ; aggregate savings ; precautionary saving ; infinite horizon ; general equilibrium ; Sparen ; Allgemeines Gleichgewicht ; Investition ; Intertemporale Allokation ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Flodén, Martin
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/56377
• Last update: 10.03.2025, 11:45 AM CET