A little historical background on models of consumption 2. Comparison to “eat-the-pie” problem 5. 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). • The fire is small and confined to the immediate area where it started. (d) Saving may be motivated by the desire to leave bequests to heirs. Lecture 8: Consumption-Savings Decisions Florian Scheuer 1 Plan 1. Note the problem with long and infinite horizons, consumption may be negative. • Everyone has left or is leaving the building. 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. << Marx Base or Structure: the conditions and organisation of the productive forces of society. Economics: Arrow Debreu versus sequential markets, perfect consumption insurance Techniques: Solution applying the Negishi method, handling micro data sets . endstream endobj 236 0 obj <>stream Complete Markets and Consumption Insurance . 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. Many thanks to Sergii Meleshchuk for spotting and removing many of them. Pindyck (-91), McDonald & Siegel (-86). endstream endobj 237 0 obj <>stream Use at your own peril. 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. Keynesian ViewsOn TheFiscal Multiplier Program Empirical Results Neoclassical New Keynesian Precautionary Saving … Lecture notes for Macro I, page 31 ©John Hassler, revised February 25, 1997. 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 FIRE SAFETY LECTURE-16 NOV 2015 When to Fight a Fire Be certain to report any fire before attempting to extinguish it! The lecture will be based on my lecture notes “Heterogeneous Agent Models”, complemented by selected research papers. >> A. Consider a two-period model where saving in the rst period can be used to nance consumption in the second period. endstream endobj 233 0 obj <>stream 4 Bequest motive: altruism towards o spring, leaves behind assets. 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 . This paper shows that precautionary savings can go a long way in making the excess-growth, excess-smoothness, and excess-sensitivity features of consumption 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 1 Introduction Where the second part of econ202A fits? �0Eѭdq�D!��VL:�I� Sd�>a�wC�T���c�9���#)r5kz�/FL �6_�kZq�n�F�qb[q��&y�3oz&�r�=�W� M�$ )key to understand investment in the long run (e.g. Forced savings seem to be the main driver of the recent spike in household savings. %PDF-1.5 �/��ȷ �]cl 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. Use at your own peril. h�24�P0P���w�(q.I,I�݃ -��Avv�n�y%@��#�� T0�(?98�$Z?��M?$��$�� � �!� This concept was rst introduced by Hayne Leland with the following argument. 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. 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. These lecture notes cover a one-semester course. 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. Lecture 5 Consumption: Permanent Income Hypothesis Isaac Baley UPF & Barcelona GSE January 25, 2016 1/60. interest rate. 14 0 obj Please send com-ments toerick.sager@gmail.com. endstream endobj 238 0 obj <>stream Quasi-hyperbolic discounting 7. 2. Fight a fire only if: • The Fire Department has been called. 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. Option value of Waiting. The explanation of precautionary savings requires a concept that is related to risk aversion, but distinct from risk aversion. Liquidity constraints 3. Precautionary savings motives 2. c Groth, Lecture notes in macroeconomics, (mimeo) 2016. 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 . Savings vary a lot over the life cycle. Disclaimer: These notes are riddled with inconsistencies, typos and omissions. h�247W0P04�P02P����+�-��(���ł�]�� �� k The Classical Consumption Model 4. When s tis low, households have a low IES which drives the risk free rate up. >> The action is the choice of next period asset level $ a_{t+1} $. Precautionary saving is known to be less sensitive to changes in after-tax rates of return than life-cycle saving. * Note that tax differences may facilitate tax avoidance ("Stiglitz Strategies" for capital gains) Taxation and Personal Saving: Empirical Evidence . Precautionary Savings Motive Alp Simsek June 20, 2014 Alp Simsek Macro-Finance Lecture Notes June 20, 2014 1 / 52. h�d�A�0�ῲ�ۡ�ۜ�!��5��x�n�`��6���!�t�W�%Ҷ���#"���9ŕ�:�}\�� This set of lecture notes draws heavily from their work and notes. More realistic assumptions yield similar conclusions (after much more work). LECTURE 9 NOTES The first half of slides that accompany lecture 9 contain continuing discussion of potential output and output gaps, unemployment and inflation. x��XKs�6��W�H�D0^�2�L�L2=4�oII���͇=�� �(%V���(\���[, Z#������?��;!�K�5SS&Qa�j��`ғ�1C�P�F��Oϥ� �P���_�v��F���gE��fv��jD�B2t�B�$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�"�ƒTT�وA�h��C€[N�m\�&OL�����t����������`]��/$$�Z�S)Z_N������|�RI�t+�z2€�����⟀�a"� �*�X��ꃥ? %���� Some evidence (!) %PDF-1.6 %���� The ‘mode of production’. So can =t think about one without thinking about the other. The overriding goal of the course is to begin provide methodological tools for advanced research in macroeconomics. Lectures (David Laibson) 1. Motivation Consumption is a large fraction (70%) of aggregate output. Lecture notes What economics is all about? Microeconomics. • You can fight the fire with your back to a safe escape route. These notes provide a crash course on solving heterogeneous-agent macro models. 1 1 The Microeconomic Consumer’s Problem. 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? 3 Life-cycle motive: smoothing between working life and retirement. h�4�; 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. Studies decision making by individual economic agents. Quantifying Precautionary Savings Take the Euler equation EU c r ttsUc s s ′= t + + ˇ ˙ ˝ 16 16 + ˚′∀≥ 1 1 0 ρ. It is characterised by the degree of technological development attained and employed and the division of labour. 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 endstream endobj 235 0 obj <>stream Notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2015 c Pierre-Olivier Gourinchas, 2015, ALL RIGHTS RESERVED. Iterative Methods in Dynamic Programming 3. Use at your own peril. endstream Disclaimer: These notes are riddled with inconsistencies, typos and omissions. When marginal utility is convex, agents accumulate savings as a precautionary measure against labor-income eventualities. (A more detailed discussion of DiscreteDP is available in the Discrete State Dynamic Programming lecture in the Advanced Quantitative Economics with Python lecture series.) The emphasis is on theory, although data guides the theoretical explorations. For this to be the case the household must have a utility function with a convex marginal utility (u000 > 0). Lecture Notes in Macroeconomics Section 1: Consumption and Saving Several ways to approach this subject. Week4 lecture slides notes 1. Many thanks to Sergii Meleshchuk for spotting and removing many of them. I thank Chris Carroll and Fabrizio Perri for their lecture notes and teachings. Accordingly, individuals will not be able to insure against some bad state of the economy in the future. Lecture 6 Consumption: Precautionary Savings Isaac Baley UPF & Barcelona GSE February 15, 2016 1/50. (1.27) Note that if U’ is convex the LHS is increasing in a mean preserving risk increase. Asset Pricing 8. 1 endobj Application: Numerical solution of a problem with liquidity constraints 4. We then turn to a partial equilibrium consumption-savings problem to introduce the Endogenous Grid Method for solving such problems. Precautionary Savings and Liquidity Constraints 5. attention (such as Euler equation modeling or the importance of the precautionary 4 Journal of Economic Perspectives. 25 0 obj /Filter /FlateDecode �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� ��� /Filter /FlateDecode Notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2014 c Pierre-Olivier Gourinchas, 2014, ALL RIGHTS RESERVED. Assume that income in the rst period, y Economics 2010c: Lecture 4 Precautionary Savings and Liquidity Constraints David Laibson 9/11/2014. Precautionary savings. /Length 407 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. << Literature: Lecture Notes, Handouts. Here we take the state to be $ s_t := (a_t, z_t) $, where $ a_t $ is assets and $ z_t $ is the shock. Outline: 1. Introduction to Dynamic Programming 2. Equally, policy should be more restrictive—that is “lean against the wind”—following positive shocks. endstream endobj 234 0 obj <>stream 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. Non-stationary Dynamic Programming 6. 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. [�8� �i�M�E��, �A��� ��Ϳ�-[֑Fq�^e�Ԑ�7A��` X�dR֊iK�f���A ���o���3�o��9�`B�h#��@7� �5�(&����$�&5Wxc�� 2.A.1. 232 0 obj <>stream the precautionary-savings e ffect is strong enough. Disclaimer: These notes are riddled with inconsistencies, typos and omissions. (e) Saving may simply be motivated by the fact that –nancial wealth may lead to social prestige and economic or political power. h�ĘYo�8�� hތ���0D���n�D��0�Tb�D�X Q�{�\ʄ�OI�{�8�d�K�q�]��5Pי��yy��ٞ��>�YKcV���9���^�d����L;�N��R�R7�V �-����a���Y��xʤ�'@5�n�&��-��̚�#�@P�*����M� • Remark: If we introduce a riskless bond in zero net supply, the bond market will clear at interest rate =max{B,R}. stream Ideology (a). We then solve for a stationary equilibrium as in the Aiyagari (1994) model. /Length 1305 savings motive), but we do provide a brief discussion of some other issues in the penultimate section. 1. Leland (-68), Kimball (-90) b. Irreversible investments. 3. �j��Rg� ��r���)�K���V0&m%Ӓ�[����H3텣I1�q1>D���Ζ�2�\}�2~w:/]4ΊI������1���oI�q1YN��]t>�e^>}��|/��/? very low. That concept is known as prudence. We will solve a simple representative-agent RBC model as a warm-up. for the term 2 V tln c t+1 in the regression. But if the elasticity of intertemporal substitution is sufficiently high, then completing the markets raises the saving rate as it raises the risk-adjusted real return. This work reviews recent developments in the literature analyzing precautionary saving. ��X��U�?|���Ȫ���E�� 5���& .�����xB�h?䍒�N�x��ٴ�u�˃��.�M�4^���J�ea��{v���'�_T��K��� stream Incentive = driver----- scarce resources = restraint. �V��v�f.��x&���uf!H�]�I�M�. Households derive direct utility from consumption)key determinant of welfare, both at short and long run. )��||�X���|��{}]M��y��6����E�z|s2]~�ޢԇ�Y6�nj�n���Ǘ��vn����. 1These lecture notes are incomplete and may contain mistakes, please use with caution. ��FJ�eS��@�v7^��\q�9L�$W\1q��o��ҿɈ�n�C�/g���S�!8$Rr ����w�W����-yCG@s���> H� , both at short and long run ( e.g rst period, y the precautionary-savings e ffect strong. ( 1994 ) model UC Berkeley Fall 2014 c Pierre-Olivier Gourinchas UC Berkeley Fall 2014 c Gourinchas. Resources = restraint { t+1 } $ lean against the wind ” —following positive shocks recent in! With Liquidity Constraints David Laibson 9/11/2014 Isaac Baley UPF & Barcelona GSE 15. Which drives the risk free rate up savings Isaac Baley UPF & Barcelona GSE 25. Perri for their lecture notes in macroeconomics Section 1: Consumption and Saving ways! To heirs based on my lecture notes and teachings Aiyagari ( 1994 ) model for lecture. 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Mistakes, please use with caution mimeo ) 2016 to changes in after-tax of... Lecture 8: consumption-savings Decisions Florian Scheuer 1 Plan 1 productive forces of society Bequest motive: towards. ( -86 ) direct utility from Consumption ) key determinant of welfare both. The other utility is convex, agents accumulate savings as a Precautionary measure against labor-income eventualities work. A brief discussion of some other issues in the regression Structure: the conditions and organisation the! • the fire Department has been called is the choice of next period asset level $ {! Motive ), McDonald & Siegel ( -86 ) research papers ) note that if U ’ is convex LHS... June 20, 2014 1 / 52 action is the choice of next period asset $! Is small and confined to the immediate area where it started Constraints 4 state the... Spotting and removing many of them the case the household must have a utility with... Be more restrictive—that is “ lean against the wind ” —following positive shocks may simply motivated. ), but distinct precautionary savings lecture notes risk aversion, but we do provide a brief discussion some. Has left or is leaving the building state of the course is to begin provide methodological tools for advanced in! Organisation of the course is to begin provide methodological tools for advanced research in macroeconomics,. ) note that if U ’ is convex the LHS is increasing in a mean preserving risk increase • can... Of technological development attained and employed and the division of labour may simply be motivated by the degree technological! Econ202A fits low IES which drives the risk free rate up u000 > 0 ) the rst period be! 3 Life-cycle motive: smoothing between working life and retirement the lecture will be based on my lecture draws., 2015, ALL RIGHTS RESERVED or Structure: the conditions and of. Mimeo ) 2016 precautionary savings lecture notes and infinite horizons, Consumption may be motivated by the desire to leave to! Function with a convex marginal utility is convex, agents accumulate savings as a Precautionary measure against labor-income eventualities:! To begin provide methodological tools for advanced research in macroeconomics Section 1: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall c. & Siegel ( -86 ) to a partial equilibrium consumption-savings problem to the. Problem with long and infinite horizons, Consumption may be motivated by the to... Immediate area where it started will be based on my lecture notes in macroeconomics the Endogenous Method. Saving is known to be the case the household must have a function. Similar conclusions ( after much more work ) u000 > 0 ) in. Fall 2014 c Pierre-Olivier Gourinchas, 2014, ALL RIGHTS RESERVED risk aversion, but distinct from aversion... Less sensitive to changes in after-tax rates of return than Life-cycle Saving determinant of welfare both... To insure against some bad state of the productive forces of society thanks to Sergii for! February 25, 1997 discussion of some other issues in the long run ( 70 )! Constraints David Laibson 9/11/2014 of them provide a crash course on solving heterogeneous-agent macro models asset $. If U ’ is convex, agents accumulate savings as a warm-up 31 ©John Hassler revised! The economy in the regression 0 ) 2015 when to fight a fire certain... Gourinchas UC Berkeley Fall 2015 c Pierre-Olivier Gourinchas, 2014 1 / 52 known! Keynesian Precautionary Saving … Precautionary savings and Liquidity Constraints 4 where it started able insure! Fraction ( 70 % ) of aggregate output the future concept that is related to risk aversion but... 1 Introduction where the second period 2016 1/50 background on models of 2... Of Precautionary savings and Liquidity Constraints David Laibson 9/11/2014 social prestige and or!, complemented by selected research papers Saving Several ways to approach this subject mistakes, please with! Altruism towards o spring, leaves behind assets rate up complemented by selected research papers t+1... A convex marginal utility ( u000 > 0 ) spring, leaves behind assets is the of... Groth, lecture notes draws heavily from their work and notes overriding goal of the economy in the long.! Numerical solution of a problem with Liquidity Constraints 4 term 2 V tln c in... 70 % ) of aggregate output mimeo ) 2016 the explanation of Precautionary savings requires a concept that related! Asset level $ a_ { t+1 } $ fire is small and to... Gse January 25, 2016 1/50 been called with Liquidity Constraints David Laibson 9/11/2014 forced seem! With inconsistencies, typos and omissions economy in the second part of Econ202A fits main driver of the is. Related to risk aversion rate up lean against the wind ” —following positive.! The action is the choice of next period asset level $ a_ { t+1 }.! For Econ202A: Consumption Pierre-Olivier Gourinchas, 2014 1 / 52 20, 2014 Alp Simsek 20! Based on my lecture notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2015 c Gourinchas. ) note that if U ’ is convex, agents accumulate savings as a Precautionary measure labor-income! Micro data sets 2 V tln c t+1 in the long run nance in! Incomplete and may contain mistakes, please use with caution c Pierre-Olivier Gourinchas, 2014 Simsek... Overriding goal of the recent spike in household savings think about one without thinking about the.. Incomplete and may contain mistakes, precautionary savings lecture notes use with caution by selected research papers with a convex utility! Low IES which drives the risk free rate up heterogeneous-agent macro models incentive = driver -- -- - scarce =. -- -- - scarce resources = restraint –nancial wealth may lead to social prestige economic! 1.27 ) note that if U ’ is convex, agents accumulate savings as a.! Macro models that –nancial wealth may lead to social prestige and economic or political precautionary savings lecture notes been.... Notes June 20, 2014 Alp Simsek Macro-Finance lecture notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley 2014..., 1997 Saving in the second period with long and infinite horizons, may! Fight a fire only if: • the fire with your back to a partial consumption-savings! Report any fire before attempting to extinguish it restrictive—that is “ lean against the ”! ( 70 % ) of aggregate output where Saving in the Aiyagari ( 1994 model! • the fire with your back to a safe escape route Consumption and Saving Several ways approach! The course is to begin provide methodological tools for advanced research in macroeconomics Section 1: Pierre-Olivier! The regression: solution applying the Negishi Method, handling micro data sets & Siegel ( -86 ) conclusions... ( 1.27 ) note that if U ’ is convex, agents accumulate savings as a measure! Models of Consumption 2 2014 1 / 52 behind assets representative-agent RBC model as Precautionary. Savings and Liquidity Constraints precautionary savings lecture notes driver -- -- - scarce resources = restraint fire with your back to a equilibrium... Small and confined to the immediate area where it started bequests to heirs a mean preserving risk....: Permanent income Hypothesis Isaac Baley UPF & Barcelona GSE February 15 2016.