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Effects of Uncertainty on Household Saving Rate

Zaman, Rubaiya and Carannate, Maria and Ferra, Emi (2013): Effects of Uncertainty on Household Saving Rate.

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Abstract

In this master thesis we attempted to investigate the role of economic uncertainty in driving the behavior of household savings for six European countries: Germany, France, Finland, United Kingdom (UK), Portugal and Italy. We focused on three main sources of economic uncertainty: Unemployment Risk, Fiscal Policy Uncertainty and Financial Crisis-Investment risk. We used Unemployment rate as a proxy for labor income uncertainty and the risk of an income loss. We computed the volatility of financial stock prices for each country as an indicator for the presence of a financial crisis. With regard to policy uncertainty, we employed three different measures: a Policy Uncertainty Index constructed by Baker, Bloom, and Davis; Debt to GDP ratio and Government Surplus / Deficit over GDP. We estimated first a Structural Vector Autoregressive (SVAR) model, separately for each country, using quarterly data from 1999 to 2012 and we compared country-specific impulse responses on savings rates. We found that household savings rate reacts in response to fiscal and unemployment shocks differently in each country, whereas we didn’t find any significant response to financial stock price volatility. We then proceeded with the Bayesian estimation of the reduced form VARs for the panel of countries mentioned above as a Hierarchical Linear Model. We focused our analysis on the Average Impulse Responses with the aim of analyzing the aggregate effect on household savings of shocks shared by all countries.

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