PRECAUTIONARY SAVINGS AND CPF CONTRIBUTIONS IN THE PRESENCE OF A BORROWING CONSTRAINT

2002 ◽  
Vol 47 (01) ◽  
pp. 129-152 ◽  
Author(s):  
CHERN WOON LAM ◽  
BASANT K. KAPUR
Keyword(s):  
Capital Markets ◽  
Borrowing Constraints ◽  
Precautionary Savings ◽  
Contribution Rate ◽  
Income Uncertainty ◽  
Borrowing Constraint ◽  
Private Savings ◽  
Optimisation Model ◽  
Intertemporal Optimisation

The neutrality result that total private savings (voluntary and compulsory) are invariant to a change in the employee's CPF contribution rate has been derived by Hoon (1991) and Liew (2000), both of whom assumed perfect capital markets. It was shown by Lim (1994) to hold in a model with borrowing constraints as long as the latter are nonbinding. In this article, we integrate the phenomena of income uncertainty (from Liew) and borrowing constraints (from Lim) in a stochastic, intertemporal optimisation model. We demonstrate the existence of precautionary savings and, contrary to received thinking, the nonneutrality result of total savings to the employee's CPF contribution rate even for workers with positive voluntary savings. The broader implications of this result are also discussed.

Financial Integration, Savings Gluts, and Asset Price Booms

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Felix Zhiyu Feng ◽  
Will Jianyu Lu ◽  
Caroline H. Zhu
Keyword(s):  
Financial Integration ◽  
Asset Price ◽  
Substitution Effect ◽  
Wealth Effect ◽  
Precautionary Savings ◽  
Domestic Capital ◽  
Borrowing Constraint ◽  
Savings Rate ◽  
Financing Costs ◽  
Capital Outflows

AbstractCapital outflows after financial integration can lead to simultaneous increases in the national savings rate and asset prices of an economy with substantial financing costs. Under autarky, firms invest in risky capital while facing a borrowing constraint that creates a need for precautionary savings. Financial integration provides firms with access to foreign risk-free assets and results in two effects: a substitution effect, whereby firms divert some investments to foreign assets and cause capital outflows; and a wealth effect, whereby they grow richer in equilibrium and thus demand more domestic capital. Savings gluts and asset price booms occur when the wealth effect dominates.

Anatomy of Corporate Borrowing Constraints*

2020 ◽  
Vol 136 (1) ◽  
pp. 229-291 ◽  
Author(s):  
Chen Lian ◽  
Yueran Ma
Keyword(s):  
Asset Price ◽  
Cash Flows ◽  
Borrowing Constraints ◽  
Collateral Damage ◽  
Total Debt ◽  
Borrowing Constraint ◽  
Corporate Borrowing ◽  
Physical Assets ◽  
Macro Finance ◽  
Nonfinancial Firms

Abstract Macro-finance analyses commonly link firms’ borrowing constraints to the liquidation value of physical assets. For U.S. nonfinancial firms, we show that 20% of debt by value is based on such assets (asset-based lending in creditor parlance), whereas 80% is based predominantly on cash flows from firms’ operations (cash flow–based lending). A standard borrowing constraint restricts total debt as a function of cash flows measured using operating earnings (earnings-based borrowing constraints). These features shape firm outcomes on the margin: first, cash flows in the form of operating earnings can directly relax borrowing constraints; second, firms are less vulnerable to collateral damage from asset price declines, and fire sale amplification may be mitigated. Taken together, our findings point to new venues for modeling firms’ borrowing constraints in macro-finance studies.

The Buffer Stock Model

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Marginal Utility ◽  
Credit Constraints ◽  
Liquidity Constraints ◽  
Borrowing Constraints ◽  
Precautionary Saving ◽  
Buffer Stock ◽  
Borrowing Constraint ◽  
Stock Model ◽  
Intertemporal Decisions ◽  
Period Model

We analyze models that combine precautionary saving and liquidity constraints to provide a unified, more realistic treatment of intertemporal decisions. We start off with a simple three-period model to illustrate how the expectation of future borrowing constraints can induce precautionary saving even in scenarios in which marginal utility is linear. A more general model that allows liquidity constraints and precautionary saving to interact fully is the buffer stock model, of which there are two versions. One, developed by Deaton (1991), emphasizes the possibility that a prudent and impatient consumer may face credit constraints. The other, by Carroll (1997), features the same type of consumer but allows for the possibility of income falling to zero and so generating a natural borrowing constraint.

Constrained Credit

2017 ◽  
Author(s):  
Stefan Homburg
Keyword(s):  
Interest Rates ◽  
Great Recession ◽  
Borrowing Constraints ◽  
Monetary Policies ◽  
The Great Recession ◽  
Credit Creation ◽  
Advanced Economies ◽  
Borrowing Constraint ◽  
Depth Analysis ◽  
Money Creation

Chapter 4 considers economies with borrowing constraints. This assumption is motivated by the observation that monetary expansions after the Great Recession did not entail inflation in the expected manner. At the same time, nominal and real interest rates tended to decline in many advanced economies. The text offers an in-depth analysis of credit crunches, liquidity traps, and interest rates at the zero lower bound and demonstrates that borrowing constraints help reconcile theory and evidence. According to the key insight, a binding borrowing constraint detaches money creation from credit creation. In this case, inflation ceases to be a monetary phenomenon, as in standard models, but becomes a credit phenomenon. This finding explains why expansionary monetary policies failed to produce inflation since the Great Recession.

scholarly journals The Power of Forward Guidance Revisited

2016 ◽  
Vol 106 (10) ◽  
pp. 3133-3158 ◽  
Author(s):  
Alisdair McKay ◽  
Emi Nakamura ◽  
Jón Steinsson
Keyword(s):  
Interest Rates ◽  
Borrowing Constraints ◽  
Precautionary Savings ◽  
Complete Markets ◽  
Income Risk ◽  
Forward Guidance ◽  
Highly Sensitive ◽  
Monetary Models ◽  
Central Tool ◽  
Far Future

In recent years, central banks have increasingly turned to forward guidance as a central tool of monetary policy. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and these effects grow with the horizon of the forward guidance. We present a model in which the power of forward guidance is highly sensitive to the assumption of complete markets. When agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to changes in future interest rates. As a consequence, forward guidance has substantially less power to stimulate the economy. (JEL E21, E40, E50)

Decomposition of effects of social security on private savings

2012 ◽  
Vol 11 (3) ◽  
pp. 419-438 ◽  
Author(s):  
MINKI HONG
Keyword(s):  
Social Security ◽  
Labor Supply ◽  
Dynamic Model ◽  
Precautionary Savings ◽  
Stochastic Dynamic ◽  
Private Savings ◽  
Saving Behavior ◽  
Asset Holdings

AbstractThe main aim of this paper is to decompose the effects of social security on private savings and quantify to what extent each factor that impacts saving behavior account for the effects of social security. For this purpose, I estimate a stochastic dynamic model in which households facing income and survival uncertainty choose optimal levels of consumption, asset holdings and labor supply. In this model, social security pensions reduce private assets by less than 10%. Bequest and precautionary savings motives are the main reasons of this partial offset. Uncertainty on future benefits has no role to play on the effect.

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