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Liquidity Constraints and Precautionary Savings: A Quantitative Analysis

By Makoto Nirei


In this paper I quantify the effects of liquidity constraint and precautionary motive of savings in the framework of a stochastic dynamic general equilibrium model. I show that the Zeldes’s estimate [13] of the excess consumption growth for the low asset holders is consistent with the framework when the borrowing constraint point is three months ’ worth of average wage income. A Monte Carlo test for the constraint point shows that the estimate is robust both to estimation errors and parameter specifications. Calibrating the model with the estimated borrowing constraint, I show that an increase in endowment shock within the range of empirical findings can cause 1.2 % increase in aggregate saving rate and 10 % increase in aggregate capital at the steady state.

Year: 2004
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