Forward-Looking Behavior, Precautionary Savings, and Borrowing Constraints in a Poor, Agrarian Economy: Tests Using Rainfall Data

The Power of Forward Guidance Revisited

The American Economic Review ◽

10.1257/aer.20150063 ◽

2016 ◽

Vol 106 (10) ◽

pp. 3133-3158 ◽

Cited By ~ 111

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)

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Quantifying borrowing constraints and precautionary savings

Review of Economic Dynamics ◽

10.1016/j.red.2006.01.002 ◽

2006 ◽

Vol 9 (2) ◽

pp. 353-363 ◽

Cited By ~ 4

Author(s):

Makoto Nirei

Keyword(s):

Borrowing Constraints ◽

Precautionary Savings

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

The Singapore Economic Review ◽

10.1142/s0217590802000432 ◽

2002 ◽

Vol 47 (01) ◽

pp. 129-152 ◽

Cited By ~ 1

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.

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SHOULD THE PRIVATE SECTOR PROVIDE PUBLIC CAPITAL?

Macroeconomic Dynamics ◽

10.1017/s1365100507060130 ◽

2007 ◽

Vol 11 (3) ◽

pp. 318-346

Author(s):

SANTANU CHATTERJEE

Keyword(s):

Open Economy ◽

Public Capital ◽

Borrowing Constraints ◽

International Capital ◽

Standard Assumption ◽

Production Externalities ◽

International Capital Markets ◽

Private Provision ◽

Large Production ◽

Government Provision

The choice between private and government provision of a productive public good like infrastructure (public capital) is examined in the context of an endogenously growing open economy. The accumulation of public capital need not require government provision, in contrast to the standard assumption in the literature. Even with an efficient government, the relative costs and benefits of government and private provision depend crucially on the economy's underlying structural conditions and borrowing constraints in international capital markets. Countries with limited substitution possibilities and large production externalities may benefit from governments encouraging private provision of public capital through targeted investment subsidies. By contrast, countries with flexible substitution possibilities and relatively smaller externalities may benefit either from governments directly providing public capital or from regulation of private providers. The transitional dynamics also are shown to depend on the underlying elasticity of substitution and the size of the production externality.

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