Abstract
Heightened uncertainty since the onset of the Great Recession has materially increased saving rates, contributing to lower consumption and GDP growth. Consistent with a model of precautionary savings in the face of uncertainty, the paper finds for a panel of advanced economies that greater labor income uncertainty is significantly associated with higher household savings. These results are robust to controlling for other determinants of saving rates, including wealth-to-income ratios, the government fiscal balance, demographics, credit conditions, and global growth and financial stress. The estimates imply that at least two-fifths of the sharp increase in household saving rates between 2007 and 2009 can be attributed to the precautionary savings motive.
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Notes
The role of uncertainty was highlighted by Christina Romer (1990) in her analysis of the Great Depression. She found that a high level of stock market volatility in 1929 induced caution in the purchase of consumer durables and, thereby, contributed to the sharp decline in consumption.
Several other papers have analyzed the determinants of saving rates using cross-country panel data, among which Schmidt-Hebbel, Webb, and Corsetti (1992), Edwards (1996), and Masson, Bayoumi, and Samiei (1998).
Alternatively, we could assume that permanent income Y is multiplied by a lognormally distributed mean-one shock ɛ. The model responses to an increase in the variance of ɛ are qualitatively identical to an increase in unemployment u. We thus preferred to use our unemployment specification since the unemployment rate will be used as one of the regressors.
More precisely, β is set to 0.97933 in order for the model to generate an equilibrium wealth-to-income ratio of 2. This is the average ratio of financial net worth to disposable income in our data set between 2005 and 2009.
For an early discussion of the impact of investment risk on saving, see Sandmo (1970). The ambiguous role of investment risk for aggregate saving in general equilibrium is analyzed in Angeletos (2007).
For the United States, the University of Michigan's index of unemployment expectations provides an alternative measure of unemployment prospects. Carroll and Slacalek (2009) estimate a consumption growth equation using as an explanatory variable the fraction of consumers who expect the unemployment rate to decline over the next year minus the fraction who expect it to increase.
It is possible that stock market volatility reduces investment and increases unemployment. The impact of stock market volatility may thus be subsumed in other explanatory variables that we use.
We could have alternatively included the house price-to-income ratio rather than its change. However, that measure would be difficult to interpret since it is a ratio of normalized indices. Furthermore, in our sample, saving rates appear to be correlated with the change in the index rather than the level of the index.
Column (1) is again provided as reference for the reader's convenience; it is the same as column (2) in Table 3.
See Carroll, Slacalek, and Sommer (2012) for a recent analysis of the U.S. saving rate using the senior loan officer survey.
An appreciation of the Swiss franc (relative to the U.S. dollar) is sometimes seen as a “flight to safety.” Such appreciation behaves in a manner similar to a rise in the TED spread.
Previous studies have tried to control for precautionary motives only using very imperfect measures, such as inflation.
References
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Additional information
*Ashoka Mody is Deputy Director in the IMF Research Department. Franziska Ohnsorge, and Damiano Sandri are economists in the IMF European Department. The authors are grateful to Olivier Blanchard, Christopher Carroll, Thomas Harjes, Philip Lane, Jaewoo Lee, Daniel Leigh, Steve Kamin, Martin Weitzmann, and seminar participants at the Deutsche Bundesbank for comments. The paper has greatly benefited from the comments of the editor, Pierre-Olivier Gourinchas, and two anonymous referees. The views expressed herein are those of the authors and do not necessarily represent those of the IMF or IMF policy.