Aggregate Precautionary Savings Motives

Abstract

This paper analyzes the effect of aggregate risk on households' precautionary savings, a new channel that complements the standard idiosyncratic precautionary motive. I build a general equilibrium model with incomplete markets, heterogeneous households, and aggregate risk to decompose the drivers of precautionary savings. The precautionary motive due to credit supply shocks is large, at odds with received wisdom about the low costs of aggregate fluctuations. It is larger for middle-class households, who are too rich to benefit from social programs but too poor to have enough liquid assets. Aggregate precautionary motives are important because they imply that aggregate shocks can have permanent effects even when they are temporary.

Keywords: Household finance, precautionary savings, liquid assets, household debt, borrowing constraints

JEL Classification: D14, D52, E21, E44, G11, G51