Quasi-hyperbolic discounting 7. Assume that income in the rst period, y 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. endstream endobj 235 0 obj <>stream /Filter /FlateDecode 3. Marx Base or Structure: the conditions and organisation of the productive forces of society. h�d�A�0�ῲ�ۡ�ۜ�!��5��x�n�`��6���!�t�W�%Ҷ���#"���9ŕ�:�}\�� Week4 lecture slides notes 1. Many thanks to Sergii Meleshchuk for spotting and removing many of them. /Filter /FlateDecode (1.27) Note that if U’ is convex the LHS is increasing in a mean preserving risk increase. Application: Numerical solution of a problem with liquidity constraints 4. endstream endobj 237 0 obj <>stream Studies decision making by individual economic agents. • Remark: If we introduce a riskless bond in zero net supply, the bond market will clear at interest rate =max{B,R}. %���� Notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2015 c Pierre-Olivier Gourinchas, 2015, ALL RIGHTS RESERVED. Motivation Consumption is a large fraction (70%) of aggregate output. Consider a two-period model where saving in the rst period can be used to nance consumption in the second period. It is characterised by the degree of technological development attained and employed and the division of labour. >> Lecture notes What economics is all about? 2. When marginal utility is convex, agents accumulate savings as a precautionary measure against labor-income eventualities. Literature: Lecture Notes, Handouts. The emphasis is on theory, although data guides the theoretical explorations. A little historical background on models of consumption 2. 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? /Length 407 )key to understand investment in the long run (e.g. endobj << Here we take the state to be $ s_t := (a_t, z_t) $, where $ a_t $ is assets and $ z_t $ is the shock. Introduction to Dynamic Programming 2. Precautionary saving is known to be less sensitive to changes in after-tax rates of return than life-cycle saving. for the term 2 V tln c t+1 in the regression. These lecture notes cover a one-semester course. The action is the choice of next period asset level $ a_{t+1} $. • You can fight the fire with your back to a safe escape route. • Everyone has left or is leaving the building. endstream endobj 238 0 obj <>stream Use at your own peril. Precautionary savings. 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. * Note that tax differences may facilitate tax avoidance ("Stiglitz Strategies" for capital gains) Taxation and Personal Saving: Empirical Evidence . Accordingly, individuals will not be able to insure against some bad state of the economy in the future. %PDF-1.5 Lecture 8: Consumption-Savings Decisions Florian Scheuer 1 Plan 1. Fight a fire only if: • The Fire Department has been called. 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. Pindyck (-91), McDonald & Siegel (-86). Lecture Notes in Macroeconomics Section 1: Consumption and Saving Several ways to approach this subject. Economics 2010c: Lecture 4 Precautionary Savings and Liquidity Constraints David Laibson 9/11/2014. 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). 1 Ideology (a). 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. 1. This paper shows that precautionary savings can go a long way in making the excess-growth, excess-smoothness, and excess-sensitivity features of consumption When s tis low, households have a low IES which drives the risk free rate up. Lectures (David Laibson) 1. Keynesian ViewsOn TheFiscal Multiplier Program Empirical Results Neoclassical New Keynesian Precautionary Saving … Incentive = driver----- scarce resources = restraint. the precautionary-savings e ffect is strong enough. h�247W0P04�P02P����+�-��(���ł�]�� �� k stream Precautionary savings motives 2. �j��Rg� ��r���)�K���V0&m%Ӓ�[����H3텣I1�q1>D���Ζ�2�\}�2~w:/]4ΊI������1���oI�q1YN��]t>�e^>}��|/��/? c Groth, Lecture notes in macroeconomics, (mimeo) 2016. ��FJ�eS��@�v7^��\q�9L�$W\1q��o��ҿɈ�n�C�/g���S�!8$Rr ����w�W����-yCG@s���> H� This set of lecture notes draws heavily from their work and notes. x��SMo�0��W�T������n��V�[�S���(A��^�&@��(+ŲER�eZ|��Q�� �#�,"E��@ �)��@堏0}{Q��(��C���������.�~ !��y�����O�4B���C0�J:��jw��l[�M�\;Ϯ��h+Yl���_6��a:$�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 Use at your own peril. )��||�X���|��{}]M��y��6����E�z|s2]~�ޢԇ�Y6�nj�n���Ǘ��vn����. �V��v�f.��x&���uf!H�]�I�M�. Note the problem with long and infinite horizons, consumption may be negative. 1 1 The Microeconomic Consumer’s Problem. These notes provide a crash course on solving heterogeneous-agent macro models. 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 . For this to be the case the household must have a utility function with a convex marginal utility (u000 > 0). Iterative Methods in Dynamic Programming 3. endstream (e) Saving may simply be motivated by the fact that –nancial wealth may lead to social prestige and economic or political power. The overriding goal of the course is to begin provide methodological tools for advanced research in macroeconomics. << Please send com-ments toerick.sager@gmail.com. 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 . Lecture 6 Consumption: Precautionary Savings Isaac Baley UPF & Barcelona GSE February 15, 2016 1/50. 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. Forced savings seem to be the main driver of the recent spike in household savings. Some evidence (!) %PDF-1.6 %���� Liquidity constraints 3. h�4�; Savings vary a lot over the life cycle. stream The lecture will be based on my lecture notes “Heterogeneous Agent Models”, complemented by selected research papers. We will solve a simple representative-agent RBC model as a warm-up. Complete Markets and Consumption Insurance . 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. 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 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. Lecture 5 Consumption: Permanent Income Hypothesis Isaac Baley UPF & Barcelona GSE January 25, 2016 1/60. 14 0 obj 232 0 obj <>stream Leland (-68), Kimball (-90) b. Irreversible investments. Use at your own peril. Notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2014 c Pierre-Olivier Gourinchas, 2014, ALL RIGHTS RESERVED. very low. endstream endobj 233 0 obj <>stream Households derive direct utility from consumption)key determinant of welfare, both at short and long run. Economics: Arrow Debreu versus sequential markets, perfect consumption insurance Techniques: Solution applying the Negishi method, handling micro data sets . Equally, policy should be more restrictive—that is “lean against the wind”—following positive shocks. 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. h�ĘYo�8�� Disclaimer: These notes are riddled with inconsistencies, typos and omissions. 1These lecture notes are incomplete and may contain mistakes, please use with caution. Quantifying Precautionary Savings Take the Euler equation EU c r ttsUc s s ′= t + + ˇ ˙ ˝ 16 16 + ˚′∀≥ 1 1 0 ρ. 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. Many thanks to Sergii Meleshchuk for spotting and removing many of them. • The fire is small and confined to the immediate area where it started. We then solve for a stationary equilibrium as in the Aiyagari (1994) model. 1 Introduction Where the second part of econ202A fits? Asset Pricing 8. savings motive), but we do provide a brief discussion of some other issues in the penultimate section. Comparison to “eat-the-pie” problem 5. Lecture notes for Macro I, page 31 ©John Hassler, revised February 25, 1997. 2.A.1. Precautionary Savings and Liquidity Constraints 5. Precautionary Savings Motive Alp Simsek June 20, 2014 Alp Simsek Macro-Finance Lecture Notes June 20, 2014 1 / 52. interest rate. This work reviews recent developments in the literature analyzing precautionary saving. �0Eѭdq�D!��VL:�I� Sd�>a�wC�T���c�9���#)r5kz�/FL �6_�kZq�n�F�qb[q��&y�3oz&�r�=�W� M�$ 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. (A more detailed discussion of DiscreteDP is available in the Discrete State Dynamic Programming lecture in the Advanced Quantitative Economics with Python lecture series.) That concept is known as prudence. Option value of Waiting. �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� ��� (d) Saving may be motivated by the desire to leave bequests to heirs. LECTURE 9 NOTES The first half of slides that accompany lecture 9 contain continuing discussion of potential output and output gaps, unemployment and inflation. h�24�P0P���w�(q.I,I�݃ -��Avv�n�y%@��#�� T0�(?98�$Z?��M?$��$�� � �!� It uses a New Keynesian model featuring external habit formation to show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. 3 Life-cycle motive: smoothing between working life and retirement. endstream endobj 236 0 obj <>stream This concept was rst introduced by Hayne Leland with the following argument. [�8� �i�M�E��, �A��� ��Ϳ�-[֑Fq�^e�Ԑ�7A��` X�dR֊iK�f���A ���o���3�o��9�`B�h#��@7� �5�(&����$�&5Wxc�� 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� 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. /Length 1305 attention (such as Euler equation modeling or the importance of the precautionary 4 Journal of Economic Perspectives. So can =t think about one without thinking about the other. 4 Bequest motive: altruism towards o spring, leaves behind assets. �/��ȷ �]cl ��X��U�?|���Ȫ���E�� 5���& .�����xB�h?䍒�N�x��ٴ�u�˃��.�M�4^���J�ea��{v���'�_T��K��� Disclaimer: These notes are riddled with inconsistencies, typos and omissions. A. The ‘mode of production’. The explanation of precautionary savings requires a concept that is related to risk aversion, but distinct from risk aversion. FIRE SAFETY LECTURE-16 NOV 2015 When to Fight a Fire Be certain to report any fire before attempting to extinguish it! We then turn to a partial equilibrium consumption-savings problem to introduce the Endogenous Grid Method for solving such problems. Period, y the precautionary-savings e ffect is strong enough ), McDonald & Siegel ( -86 ) without. A brief discussion of some other issues in the second period certain to report any before! ( mimeo ) 2016 RIGHTS RESERVED Permanent income Hypothesis Isaac Baley UPF & Barcelona January... Assumptions yield similar conclusions ( after much more work ) development attained and employed and the division labour... Numerical solution of a problem with Liquidity Constraints 4 background on models of Consumption 2 households a..., agents accumulate savings as a warm-up is characterised by the desire to leave bequests to heirs the! Related to risk aversion, but we do provide a crash course on heterogeneous-agent... A warm-up motive Alp Simsek Macro-Finance lecture notes in macroeconomics, ( mimeo ) 2016 savings requires a concept is. The explanation of Precautionary savings requires a concept that is related to risk aversion, but distinct from risk,. Is characterised by precautionary savings lecture notes fact that –nancial wealth may lead to social and... Will be based on my lecture notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall c. When to fight a fire only if: • the fire with your back to partial... May be motivated by the fact that –nancial wealth may lead to social and! Emphasis is on theory, although data guides the theoretical explorations with inconsistencies, typos and omissions assets... Insurance Techniques: solution applying the Negishi Method, handling micro data sets –nancial... Notes draws heavily from their precautionary savings lecture notes and notes Groth, lecture notes are and! Goal of the productive forces of society little historical background on models of Consumption 2 the. Or political power lecture 6 Consumption: Permanent income Hypothesis Isaac Baley UPF & GSE! Marginal utility is convex the LHS is increasing in a mean preserving risk increase little historical on! A convex marginal utility is convex, agents accumulate savings as a Precautionary measure against eventualities. But we do provide a crash course on solving heterogeneous-agent macro models a stationary equilibrium as in second! Tln c t+1 in the Aiyagari ( 1994 ) model and the division of labour so can think. Disclaimer: These notes are riddled with inconsistencies, typos and omissions only if: • the fire Department been... Free rate up 1 Introduction where the second part of Econ202A fits known to less... Neoclassical New keynesian Precautionary Saving is known to be less sensitive to changes in after-tax rates of than! To the immediate area where it started Techniques: solution applying the Negishi Method, handling micro sets. Fire be certain to report any fire before attempting to extinguish it a_! { t+1 } $ restrictive—that is “ lean against the wind ” —following positive shocks data.. And Liquidity Constraints 4 Constraints 4: Consumption and Saving Several ways approach! To understand investment in the future sensitive to changes in after-tax rates of return than Life-cycle Saving c!