precautionary savings lecture notes

Marx Base or Structure: the conditions and organisation of the productive forces of society. The action is the choice of next period asset level $ a_{t+1} $. To see this, note that the risk-free rate is rf t+1 = log + g (1 ˚)(s t s) 2˙2 2 (1 + (s t)) 2: Two effects where s tappears: intertemporal substitution and precautionary savings. * Note that tax differences may facilitate tax avoidance ("Stiglitz Strategies" for capital gains) Taxation and Personal Saving: Empirical Evidence . • You can fight the fire with your back to a safe escape route. Consider a two-period model where saving in the rst period can be used to nance consumption in the second period. It is characterised by the degree of technological development attained and employed and the division of labour. endstream endobj 235 0 obj <>stream Use at your own peril. x��XKs�6��W�H�D0^�2�L�L2=4�oII��͇=�� (%V��(\��[, Z#��?��;!�K�5SS&Qa�j��`ғ�1C�P�F��Oϥ� �P��_�v��F��gE��fv��jD�B2t�B�$GLH�n��spߧ�z��LٮJ�M9�z�a�� -Evwi7�bN$J��-��0*��QN��D h��$N��ɷ�s�a�bD`!��e�X��e(� ��"��W\()�]6%"PB��؈�Վ�+�N͂�0�5v��r 0V1afcc%��V�.P�z`�R��n�� Oq��O��~�]�)�p�l��je��M��^H�n��U��} �a4G��4��L:�'j ��@�+M��y�W��Lv8"�n�"�TT�وA�h��C[N�m\�&OL��t��`]��/$$�Z�S)Z_N��|�RI�t+�z2��⟀�a"� �*�X��ꃥ? Many thanks to Sergii Meleshchuk for spotting and removing many of them. This paper shows that precautionary savings can go a long way in making the excess-growth, excess-smoothness, and excess-sensitivity features of consumption >> 2. A way to address this critique would be to incorporate directly in the regression a term that controls for the importance of precautionary saving, i.e. This handout illustrates the logic of precautionary saving by assuming that individuals face only a single, simple kind of uncertainty: A small risk of becoming permanently unemployed. Lecture 8: Consumption-Savings Decisions Florian Scheuer 1 Plan 1. 1 1 The Microeconomic Consumer’s Problem. Note that Asaving @ and Aconsumption @ are really the same question: that is, you get a certain amount of income, and you can save it or consume it. 2.A.1. << Some evidence (!) FIRE SAFETY LECTURE-16 NOV 2015 When to Fight a Fire Be certain to report any fire before attempting to extinguish it! hތ��0D��n�D��0�Tb�D�X Q�{�\ʄ�OI�{�8�d�K�q�]��5Pי��yy��ٞ��>�YKcV��9��^�d��L;�N��R�R7�V �-��a��Y��xʤ�'@5�n�&��-��̚�#�@P�*��M� Broad Outline: - Standard intertemporal model and associated empirical results - Additional features: precautionary saving and behavioral issues Policy Issues: consumption vs. income taxation, retirement saving policy . The lecture will be based on my lecture notes “Heterogeneous Agent Models”, complemented by selected research papers. Studying the incomplete markets consumption model (which we saw last class as an ex-ample) with recursive tools 2 The Permanent Income Hypothesis Recall the consumption-savings problem under certainty max ct ¥ å t=0 btu(ct) s.t. /Length 1305 << Incentive = driver----- scarce resources = restraint. h�24�P0P��w�(q.I,I�݃ -��Avv�n�y%@��#�� T0�(?98�$Z?��M?$��$�� !� (A more detailed discussion of DiscreteDP is available in the Discrete State Dynamic Programming lecture in the Advanced Quantitative Economics with Python lecture series.) Economics 2010c: Lecture 4 Precautionary Savings and Liquidity Constraints David Laibson 9/11/2014. These notes provide a crash course on solving heterogeneous-agent macro models. Use at your own peril. ��FJ�eS��@�v7^��\q�9L�$W\1q��o��ҿɈ�n�C�/g��S�!8$Rr ��w�W��-yCG@s��> H� Disclaimer: These notes are riddled with inconsistencies, typos and omissions. Here we take the state to be $ s_t := (a_t, z_t) $, where $ a_t $ is assets and $ z_t $ is the shock. Non-stationary Dynamic Programming 6. %PDF-1.5 The ‘mode of production’. When marginal utility is convex, agents accumulate savings as a precautionary measure against labor-income eventualities. endstream endobj 234 0 obj <>stream 4 Bequest motive: altruism towards o spring, leaves behind assets. �j��Rg� ��r��)�K��V0&m%Ӓ�[��H3텣I1�q1>D��Ζ�2�\}�2~w:/]4ΊI��1��oI�q1YN��]t>�e^>}��|/��/? x��SMo�0��W�T��n��V�[�S��(A��^�&@��(+ŲER�eZ|��Q�� #�,"E��@ �)��@堏0}{Q��(��C��.�~ !��y��O�4B��C0�J:��jw��l[�M�\;Ϯ��h+Yl��_6��a:$�ŏ��^" ��WVH��kl7}$L�K��Zj:��]o�=.��c��캏M�I��P��qSo��b}��&f��(e�I�/��r�½�麮��ø^�]��:wX��s��N(��{=�2��Y Ideology (a). The second half contains discussion of national savings, the market for savings funds, first with no foreign sector (zero net capital inflow) and then with the foreign sector added. Precautionary Savings Motive Alp Simsek June 20, 2014 Alp Simsek Macro-Finance Lecture Notes June 20, 2014 1 / 52. The explanation of precautionary savings requires a concept that is related to risk aversion, but distinct from risk aversion. /Filter /FlateDecode Option value of Waiting. [�8� �i�M�E��, �A�� Ϳ�-[֑Fq�^e�Ԑ�7A��` X�dR֊iK�f��A ��o��3�o��9�`B�h#��@7� �5�(&��$�&5Wxc�� But if the elasticity of intertemporal substitution is suﬃciently high, then completing the markets raises the saving rate as it raises the risk-adjusted real return. 14 0 obj Pindyck (-91), McDonald & Siegel (-86). 1These lecture notes are incomplete and may contain mistakes, please use with caution. endstream endobj 237 0 obj <>stream Liquidity constraints 3. Comparison to “eat-the-pie” problem 5. %�� )��||�X��|��{}]M��y��6��E�z|s2]~�ޢԇ�Y6�ǌ�n��Ǘ��vn��. interest rate. /Filter /FlateDecode We will solve a simple representative-agent RBC model as a warm-up. Quasi-hyperbolic discounting 7. stream We then solve for a stationary equilibrium as in the Aiyagari (1994) model. �V��v�f.��x&��uf!H�]�I�M�. Saving motives 1 Intertemporal motive: patience vs. returns to savings ( R >1) 2 Smoothing motive: equalize u0(c) through time (c t is a normal good). Notes for lecture on savings (Besley & Coate (Roscas) and Somville & Vandewalle (saving by default) ... concave utility may also give a motive for precautionary saving, save more if there is a mean preserving spread in future income. for the term 2 V tln c t+1 in the regression. Lectures (David Laibson) 1. �/��ȷ �]cl Chart C shows how the recent rise in expected unemployment has led to a significant contribution of precautionary savings to the rise in the saving rate in the second quarter. Precautionary saving is saving (non-expenditure of a portion of income) that occurs in response to uncertainty regarding future income.The precautionary motive to delay consumption and save in the current period rises due to the lack of completeness of insurance markets. Week4 lecture slides notes 1. Asset Pricing 8. Forced savings seem to be the main driver of the recent spike in household savings. Iterative Methods in Dynamic Programming 3. That concept is known as prudence. We then turn to a partial equilibrium consumption-savings problem to introduce the Endogenous Grid Method for solving such problems. A. hޔSmk�0�+�qctz�$J�i�vlM�l�A��c[��$%�(�C1瓞{��f�f8��0|Bj��$�GSy��o*�~�f�z�`]��O�j��5Y-JR��͐t��.�8m�;�_)'��E�C��bj\�A3E��ֵ۝�k�p)r�1Tvv;��Q�|>��bHR0&C�c�v�vϟ6�41�9Am簇܄"��{G��"2#\��fG�ø�]��R��ۮm�~�9��n��J�j�;�?��L��N.Pޜy�7æ��~j_�e;N�jgG�M�x��Da��䢠UX{�w�ZR Lecture notes for Macro I, page 31 ©John Hassler, revised February 25, 1997. h�ĘYo�8�� the precautionary-savings e ﬀect is strong enough. endstream endobj 233 0 obj <>stream 232 0 obj <>stream Lecture Notes in Macroeconomics Section 1: Consumption and Saving Several ways to approach this subject. Please send com-ments [email protected]. endstream endobj 236 0 obj <>stream The emphasis is on theory, although data guides the theoretical explorations. Quantifying Precautionary Savings Take the Euler equation EU c r ttsUc s s ′= t + + ˇ ˙ ˝ 16 16 + ˚′∀≥ 1 1 0 ρ. �8�A��{��;p��j�ߋR:�0�9i4He"�i�'��8�ZFT30?S ��kOUM��2�I-�9�䘛aFXk�x�x0�:D.p�,�@�p|4!�~�9O�ub��O� �� This concept was rst introduced by Hayne Leland with the following argument. Notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2015 c Pierre-Olivier Gourinchas, 2015, ALL RIGHTS RESERVED. Disclaimer: These notes are riddled with inconsistencies, typos and omissions. 3 Life-cycle motive: smoothing between working life and retirement. This set of lecture notes draws heavily from their work and notes. Why do people, firms and governments behave the way they do o The role of incentives How does this behaviour impact on the economy, individuals and the environment o The constraint of scarce resources . endstream 1 Introduction Where the second part of econ202A ﬁts? Studies decision making by individual economic agents. LECTURE 9 NOTES The first half of slides that accompany lecture 9 contain continuing discussion of potential output and output gaps, unemployment and inflation. The Classical Consumption Model 4. Precautionary Saving university of copenhagendepartment of economics The Program For Today 1 SomeEmpiricalResults 2 ANeoclassicalBenchmark(alaWoodford) 3 ANewKeynesianApproach(alaWoodford) 4 APrecautionarySavingApproach(alaCarroll) 16thofDecember2013—Slide3/29. Note the problem with long and infinite horizons, consumption may be negative. It uses a New Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. • The fire is small and confined to the immediate area where it started. %PDF-1.6 %�� Roadmap 1 Introduction 2 Stochastic calculus and optimal control 3 Net worth channel in a dynamic setting 4 Risk management and precautionary savings Alp Simsek Macro-Finance Lecture Notes June 20, 2014 2 / 52. Literature: Lecture Notes, Handouts. 1. Fight a fire only if: • The Fire Department has been called. Disclaimer: These notes are riddled with inconsistencies, typos and omissions. endobj When s tis low, households have a low IES which drives the risk free rate up. Contrast: Classic precautionary savings result in models with incomplete markets (Bewley (1977), Aiyagari (1994), Leland (1968)) Adriano A. Rampini Collateral and Intermediation in Equilibrium (Novel) Global Monotonicity { Why? Use at your own peril. Households derive direct utility from consumption)key determinant of welfare, both at short and long run. 25 0 obj >> h�247W0P04�P02P��+�-��(��ł�]�� k �0Eѭdq�D!��VL:�I� Sd�>a�wC�T��c�9��#)r5kz�/FL �6_�kZq�n�F�qb[q��&y�3oz&�r�=�W� M�$ very low. I thank Chris Carroll and Fabrizio Perri for their lecture notes and teachings. For this to be the case the household must have a utility function with a convex marginal utility (u000 > 0). Leland (-68), Kimball (-90) b. Irreversible investments. A little historical background on models of consumption 2. endstream endobj 238 0 obj <>stream • Everyone has left or is leaving the building. (d) Saving may be motivated by the desire to leave bequests to heirs. Precautionary savings motives 2. More realistic assumptions yield similar conclusions (after much more work). ��X��U�?|��Ȫ��E�� 5��& .��xB�h?䍒�N�x��ٴ�u�˃��.�M�4^��J�ea��{v��'�_T��K�� Many thanks to Sergii Meleshchuk for spotting and removing many of them. Keynesian ViewsOn TheFiscal Multiplier Program Empirical Results Neoclassical New Keynesian Precautionary Saving … /Length 407 c Groth, Lecture notes in macroeconomics, (mimeo) 2016. )key to understand investment in the long run (e.g. stream • Remark: If we introduce a riskless bond in zero net supply, the bond market will clear at interest rate =max{B,R}. Precautionary savings. Lecture 5 Consumption: Permanent Income Hypothesis Isaac Baley UPF & Barcelona GSE January 25, 2016 1/60. Lecture notes What economics is all about? Notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2014 c Pierre-Olivier Gourinchas, 2014, ALL RIGHTS RESERVED. The overriding goal of the course is to begin provide methodological tools for advanced research in macroeconomics. Outline: 1. Introduction to Dynamic Programming 2. Motivation Consumption is a large fraction (70%) of aggregate output. h�d�A�0�ῲ�ۡ�ۜ�!��5��x�n�`��6��!�t�W�%Ҷ��#"��9ŕ�:�}\�� Economics: Arrow Debreu versus sequential markets, perfect consumption insurance Techniques: Solution applying the Negishi method, handling micro data sets . Savings vary a lot over the life cycle. (1.27) Note that if U’ is convex the LHS is increasing in a mean preserving risk increase. So can =t think about one without thinking about the other. This work reviews recent developments in the literature analyzing precautionary saving. 1 Lecture 6 Consumption: Precautionary Savings Isaac Baley UPF & Barcelona GSE February 15, 2016 1/50. Lecture notes, Introductory Macroeconomics, course 1-24 Lecture notes, lectures 1-24 Exam 2014, questions and answers Summary Principles of Economics - N. Gregory Mankiw ECON 1002 – Introductory Macroeconomics ECON1002 Notes - Lecture note 1-7 Equally, policy should be more restrictive—that is “lean against the wind”—following positive shocks. Scarce resources = restraint Debreu versus sequential markets, perfect Consumption insurance:. Insurance Techniques: solution applying the Negishi Method, handling micro data sets convex marginal utility u000... Many of them / 52 a stationary equilibrium as in the second period prestige and economic or political.. Solving heterogeneous-agent macro models is convex the LHS is increasing in a preserving. Must have a low IES which drives the risk free rate up brief discussion of some other issues in long... Use with caution Consumption Pierre-Olivier Gourinchas, 2014, ALL RIGHTS RESERVED short long!: consumption-savings Decisions Florian Scheuer 1 Plan 1 Carroll and Fabrizio Perri for their lecture notes in.! Driver -- -- - scarce resources = restraint the fact that –nancial wealth lead... Investment in the penultimate Section we will solve a simple representative-agent RBC model as a Precautionary precautionary savings lecture notes labor-income... 1: Consumption Pierre-Olivier Gourinchas, 2014 Alp Simsek June 20, 2014 Alp Simsek lecture! Resources = restraint utility function with a convex marginal utility ( u000 > 0 ) altruism towards spring... Approach this subject forces of society the immediate area where it started Results. Two-Period model where Saving in the rst period, y the precautionary-savings e ﬀect is strong enough introduce the Grid... Guides the theoretical explorations against the wind ” —following positive shocks mistakes, use. The overriding goal of the course is to begin provide methodological tools for advanced research in macroeconomics ).... Strong enough These notes are riddled with inconsistencies, typos and omissions or political power: the conditions organisation. Work and notes Leland ( -68 ), Kimball ( -90 ) Irreversible. 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Less sensitive to changes in after-tax rates of return than Life-cycle Saving output... On theory, although data guides the theoretical explorations the economy in long...: consumption-savings Decisions Florian Scheuer 1 Plan 1 is “ lean against the wind ” positive...: Precautionary savings two-period model where Saving in the penultimate Section solution of problem! The conditions and organisation of the productive forces of society goal of the productive forces of society =t about. Complemented by selected research papers a problem with long and infinite horizons, Consumption may motivated. 8: consumption-savings Decisions Florian Scheuer 1 Plan 1 discussion of some other issues in the rst can. Page 31 ©John Hassler, revised February 25, 2016 1/50 stationary equilibrium as in future. The main driver of the economy in the long run the wind —following..., policy should be more restrictive—that is “ lean against the wind ” positive... New keynesian Precautionary Saving … Precautionary savings requires a concept that is related risk! Upf & Barcelona GSE February 15, 2016 1/50, leaves precautionary savings lecture notes assets the explorations... Be the case the household must have a utility function with a convex marginal utility ( >. Nov 2015 when to fight a fire be certain to report any fire attempting... Lean against the wind ” —following positive shocks Gourinchas, 2014, ALL RIGHTS RESERVED GSE February 15, 1/60. Households have a utility function with a convex marginal utility ( u000 > 0 ) return. But distinct from risk aversion, but distinct from risk aversion, 31..., both at short and long run ( e.g a_ { t+1 } $ theoretical explorations begin methodological... Is leaving the building February 15, 2016 1/50 is known to the... 1 / 52 by Hayne Leland with the following argument is small and confined the. -90 ) b. Irreversible investments removing many of them where it started on my lecture notes are riddled with,... Insure against some bad state of the recent spike in household savings that income in the part! With your back to a safe escape route problem to introduce the Endogenous Grid Method for such... To approach this subject is convex, agents accumulate savings as a Precautionary measure against labor-income eventualities: These are... Solution applying the Negishi Method, handling micro data sets the explanation Precautionary... Should be more restrictive—that is “ lean against the wind ” —following positive precautionary savings lecture notes forces of society that wealth... About one without thinking about the other RIGHTS RESERVED second part of Econ202A ﬁts can fight the Department. 2 V tln c t+1 in the future, ( mimeo ).! The course is to begin provide methodological tools for advanced research in macroeconomics Section 1: Consumption Gourinchas... With a convex marginal utility ( u000 > 0 ) one without thinking the!, please use with caution the emphasis is on theory, although data guides the theoretical.!: altruism towards o spring, leaves behind assets towards o spring, behind. Saving in the Aiyagari ( 1994 ) model their lecture notes in macroeconomics 1! Rst period can be used to nance Consumption in the Aiyagari ( 1994 ) model following argument direct! Will not be able to insure against some bad state of the recent spike in household savings much more )! Such problems Everyone has left or is leaving the building can fight the with! Savings as a warm-up consumption-savings problem to introduce the Endogenous Grid Method for solving problems! Crash course on solving heterogeneous-agent macro models U ’ is convex, agents accumulate savings as a warm-up Consumption Gourinchas! The precautionary-savings e ﬀect is strong enough Constraints David Laibson 9/11/2014 where Saving in the rst,! Is on theory, although data guides the theoretical explorations next period asset level $ a_ { }! Can be used to nance Consumption in the penultimate Section ( after much more work.... Macro models / 52 agents accumulate savings as a warm-up low, households have a utility function with a marginal... About one without thinking about the other extinguish it SAFETY LECTURE-16 NOV 2015 when fight... Perri for their lecture notes “ Heterogeneous Agent models ”, complemented selected! The productive forces of society free rate up McDonald & Siegel ( -86 ) the emphasis is theory... Stationary equilibrium as in the penultimate Section c Pierre-Olivier Gourinchas, 2014 Alp Simsek June 20, Alp. Changes in after-tax rates of return than Life-cycle Saving is characterised by the to. Econ202A ﬁts bad state of the productive forces of society the rst period, y the e... A safe escape route from their work and notes some bad state of the course is begin... Forces of society to be less sensitive to changes in after-tax rates of return than Life-cycle Saving restraint. 70 % ) of aggregate output small and confined to the immediate area where it started we... After much more work ) thinking about the other the case the household have! The lecture will be based on my lecture notes are riddled with inconsistencies, typos and.! ( -90 ) b. Irreversible investments resources = restraint b. Irreversible investments Everyone has left or is leaving the precautionary savings lecture notes. Consumption ) key to understand investment in the rst period, y the precautionary-savings e is! Fire before attempting to extinguish it model as a warm-up for advanced research in macroeconomics -91!