Aggregate Precautionary Savings Motives

Abstract

This paper analyzes the effect of aggregate risk on households' precautionary savings motives, which complements standard idiosyncratic motives. I propose a new representation of general equilibrium models with heterogeneous households and aggregate risk to decompose the various drivers of precautionary behavior. Precautionary motives due to borrowing constraint shocks are large, nuancing received wisdom about the small impact of business cycles on individuals. They are larger for middle-class households, who are too rich to benefit from social programs but too poor to have enough liquid assets. In aggregate, they are key to help heterogeneous agent models explain periods of creditless recovery.

Keywords: Precautionary savings, borrowing constraints, heterogeneous households, creditless recovery, D52, E21, E30, E44, G51