Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56377
Authors: 
Flodén, Martin
Year of Publication: 
2005
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance 591
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.
Subjects: 
equilibrium interest rate
aggregate savings
precautionary saving
infinite horizon
general equilibrium
JEL: 
D52
D91
E21
Document Type: 
Working Paper

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