Document Type

Article

Journal/Book Title/Conference

Economics Research Institute Study Paper

Volume

11

Publisher

Utah State University Department of Economics

Publication Date

2005

First Page

1

Last Page

29

Abstract

This paper quantifies the effects of precautionary saVIngs In a dynamic stochastic general equilibrium model. I show that Zeldes's estimate [14] of the excess consumption growth for low asset holders is consistent with an incomplete market model when a borrowing constraint point is set at three months' worth of average wage income. The hypotheses of no-borrowing specification and solvency-constraint specification are rejected by a test distribution derived from the stationary equilibrium distribution. At the estimated borrowing constraint, an increase in endowment shock within the range of empirical findings can cause 1.2% increase in saving rate and 10% increase in capital.


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