Precautionary Savings Motives Research Articles

Do paid maternity leave mandates affect corporate cash holdings?

This study examines whether paid maternity leave laws affect corporate cash holdings. Using a difference-in-differences approach, we find the staggered introduction of these laws significantly reduce firm cash reserves, especially in labor-intensive industries. Further analysis indicates that increased employee productivity post-adoption associates with declining cash holdings, representing a channel linking these laws to precautionary savings motives.

Navigating through Political Risk in Vietnam: The Role of Corporate Cash Holdings

ABSTRACT This paper investigates the effect of political risk on corporate cash holdings in Vietnam from 2009 to 2018. We show that political risk is positively associated with cash holdings. Our findings are robust to other advanced estimation methods when alternative measures of political risk are considered and after addressing endogeneity caveats by two-stage least square estimation. Further analyses reveal that the positive impact of political risk on cash holdings is more pronounced for financially constrained firms and firms with high institutional ownership. Overall, the findings contribute to the literature on how political risk exposure increases firm cash holdings, which is consistent with the precautionary savings motive of cash.

Analyzing state government spending: balanced budget rules or forward-looking decisions?

We analyze US state government spending behavior with a general intertemporal model allowing for asymmetry in balanced budget rules in a panel data setting. We find no strong evidence for forward-looking behavior in state spending; balanced budget rules are a significant constraint. States with budget rules imposing lighter restrictions are more likely to exhibit habit formation, while those with stricter rules demonstrate asymmetric responses to revenue changes. Evidence for a precautionary savings motive is limited. Balanced budget requirements trigger substantial pro-cyclical spending, possibly amplifying state economic volatility for states with tight fiscal rules, especially after revenue increases.

How much does schooling disutility matter?

Studies on structural education choice models are often inconsistent in choosing whether and how to include a disutility of education, especially in an environment with risk and wealth inequality. We show that adding a disutility term to the education decision, a human capital investment option, is equivalent to assuming a relationship between wealth, risk, and education. Utility gain from education is increasing in the riskiness of future consumption. A riskier environment further propels an agent to choose the human capital investment option that maximizes future income. If the degree of risk increases heterogeneously across multiple human capital investment options, risk aversion and the precautionary savings motive can compound or negate each other depending on which option has a greater increase in risk.

Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach

Abstract Recently developed HANK models, which combine Heterogeneous Agents and New Keynesian frictions, have had a considerable impact on macroeconomics. However, due to the complexity of such models, the literature has focused on numerically solved models and therefore little is known about their general properties. This paper presents a tractable HANK model that integrates Search and Matching (SAM) frictions in the labor market. The model features an endogenous idiosyncratic earnings risk, which may be procyclical or countercyclical. When this risk is countercyclical, which we argue is the empirically plausible case, there is a downward pressure on real interest rates in recessions due to a precautionary savings motive. We show that in this setting (a) the economy may get stuck in a high-unemployment steady state, (b) the Taylor principle is insufficient to eliminate the local indeterminacy of the intended steady state, and (c) nominal rigidities and inincomplete markets are complementary in terms of amplifying the impact of shocks on the macroeconomy.

Perceived Precautionary Savings Motives: Evidence from Fintech

We study the spending response of first-time borrowers to an overdraft facility and elicit their preferences, beliefs, and motives through a FinTech application. Users increase their spending permanently, lower their savings rate, and reallocate spending from non-discretionary to discretionary goods. Interestingly, liquid users react more than others but do not tap into negative deposits. The credit line acts as a form of insurance. These results are not fully consistent with models of financial constraints, buffer stock models, or present-bias preferences. We label this channel perceived precautionary savings motives: Liquid users behave as if they faced strong precautionary savings motives even though no observables, including elicited preferences and beliefs, suggest they should.

Perceived Precautionary Savings Motives: Evidence from FinTech

We study the spending response of first-time borrowers to an overdraft facility and elicit their preferences, beliefs, and motives through a FinTech application. Users increase their spending permanently, lower their savings rate, and reallocate spending from non-discretionary to discretionary goods. Interestingly, liquid users react more than others but do not tap into negative deposits. The credit line acts as a form of insurance. These results are not fully consistent with models of financial constraints, buffer stock models, or present-bias preferences. We label this channel perceived precautionary savings motives: Liquid users behave as if they faced strong precautionary savings motives even though no observables, including elicited preferences and beliefs, suggest they should.

Perceived Precautionary Savings Motives: Evidence from FinTech

In a representative sample of new borrowers, access to digital lines of credit increases the spending of consumers with ex-ante higher savings rates (liquid consumers) permanently. After access to the line of credit, these consumers reduce their existing savings rate but do not tap into negative deposits and hence do not raise debt. Through our FinTech bank setting, we can elicit consumers' risk preferences, beliefs, perceptions, and other characteristics directly. Common theoretical determinants of precautionary savings motives do not differ systematically across liquid and illiquid consumers but liquid consumers have higher subjective beliefs about the need for precautionary savings nonetheless.

Macro-prudential taxation in good times

We analyze the optimal macroprudential policy under the presence of persistent permanent shocks, which convey information about future growth. In this context, crises are characterized by long periods with positive shocks that eventually revert, rendering the collateral constraint binding and triggering deleveraging. In this environment it is optimal to tax borrowing during good times, and let agents act freely leaving the allocations undistorted, including borrowing and lending, when the economy reverts to a bad state. We contrast our findings to the case of standard shocks to the level of income, where it is optimal to tax debt in bad times, when agents need to borrow the most for precautionary savings motives. Also, taxes are used much less often and are around one-tenth of those under level shocks.

Aggregate Demand and Sovereign Debt Crises

Sovereign debt crises coincide with deep recessions. I propose a model of sovereign debt that rationalizes large contractions in economic activity via an aggregate-demand amplification mechanism. The mechanism also sheds new light on the response of consumption to sovereign risk, which I document in the context of the Eurozone crisis. By explicitly separating the decisions of households and the government, I examine the interaction between sovereign risk and the precautionary savings motive. When a default is likely, households anticipate its negative consequences and cut consumption for self-insurance reasons. The resulting shortage in aggregate spending worsens economic conditions through nominal wage rigidities, boosting default incentives and restarting the vicious cycle of high spreads and low demand. I study the implications of this feedback mechanism in a model where the government of a small open economy borrows from foreign lenders but some of the debt is held by heterogeneous domestic savers subject to uninsurable idiosyncratic income risk. I calibrate the model to Spain in the 2000s and find that about a third of the output contraction is caused by default risk. More generally, sovereign risk exacerbates volatility in consumption over time as well as across agents, creating large and unequal welfare costs even if default does not materialize.

The impact of energy price uncertainty on macroeconomic variables

This paper evaluates the macroeconomic implications of energy price volatility through the lens of a dynamic stochastic general equilibrium (DSGE) model in an open economy. The model develops a small open economy in which households consume energy products and firms use energy as productivity inputs, where the country is so small that it needs to import energy, the price of which is determined abroad. Whereas positive energy price shocks cause an economic slowdown due to higher costs for consumers and firms, energy price volatility shocks generate an increase in GDP in the short-run and a reversal in the long-run. These findings are empirically supported by estimates from a Panel VAR model applied to 10 Asian economies, where energy price volatility has a positive impact on GDP in the short-run. Moreover, the paper finds that increasing demand or supply uncertainty also affect energy prices, with amplified fluctuations relative to a model that abstracts from energy. Market volatility leads households to cut consumption for precautionary savings motives, which in turn increases investment.Both energy price and uncertainty fluctuation lead to high macroeconomic volatility in the business cycle. Policy makers should encourage investment in energy security and renewable energy, such that households and firms would become less responding to fluctuations in the non-renewable energy market.

The Relationship Between Disutility of Education, Wealth, and Schooling Decisions

Studies on structural education choice models are often inconsistent in choosing whether and how to include disutility of education, especially in an environment with risk and wealth inequality. We show that adding a disutility term to the education decision, a human capital investment option, is equivalent to assuming a relationship between wealth, risk, and education. Utility gain from education is increasing in the riskiness of future consumption. A riskier environment further propels an agent to choose the human capital investment option that maximizes future income. If the degree of risk increases heterogeneously across multiple human capital investment options, risk aversion and the precautionary savings motive can compound or negate each other depending which option has a greater increase in risk.

Product Market Strategy and Corporate Policies

How does product life cycle affect investment and financing? To answer this question, we structurally estimate a dynamic model where the firm chooses product portfolio characteristics that influence cash flow dynamics and shape corporate policies. In the model, the firm trades off higher profitability of newer products versus product introduction costs. Using disaggregated product-level data, we find that the product dimension is critical in quantitatively explaining cash flow dynamics, investment and financing, and has materially important valuation effects. In particular, we show that product introductions and capital investment act as complements and that product dynamics induce stronger precautionary savings motives. Our estimates reveal that the product life cycle effect is more pronounced for firms with smaller product portfolios, supplying less unique products, and competing more intensely.

Disentangling Financial Constraints, Precautionary Savings, and Myopia: Household Behavior Surrounding Federal Tax Returns

We explore household consumption surrounding federal tax returns filings and refunds receipt to test various theories of consumption. Because uncertainty regarding the refund is resolved at filing, precautionary savings theory predicts an increase in consumption at this date. Contrary to this prediction, we find that households generally do not increase consumption at filing. Following the receipt of the refunds, consumption of both durables and nondurables increases dramatically and then decays quickly. Our results show that households, on average, are financially constrained, exhibit myopic behavior, and do not respond to precautionary savings motives.

Got Rejected? Real Effects ofNotGetting a Loan

Using a lender cutoff rule that generates plausibly exogenous variation in credit supply, I investigate a new channel through which funding shocks are transmitted to the real economy. Based on a sample of more than 15,000 loan applications from small- and medium-sized enterprises, I find that precautionary savings motives can aggravate real effects: low-liquidity firms whose loan applications were rejected increase cash holdings and cut noncash assets in excess of the requested loan amount. These results point to the amplifying effect of precautionary savings motives in the transmission of credit supply shocks. Received December 11, 2016; editorial decision February 22, 2018 by Editor Philip Strahan.

Estimating the Demand for Reserve Assets Across Diverse Groups

This paper takes a fresh look at the determinants of reserves holding with the aim of highlighting similarities and differences in the motives for holding reserves among emerging markets (EMs), advanced economies (AEs), and low-income countries (LICs). We apply two panel estimation techniques: fixed effects (FE) and common correlated effects pooled mean group (CCEPMG). FE regression results suggest that precautionary savings motives, both current account- and capital account-related, are generally the most important determinants of reserves holding across country groups and that their importance has increased for AEs and LICs since the global financial crisis while receding for EMs. Mercantilist motives matter mostly for EMs. Intertemporal motives have been gaining importance everywhere over time. The CCEPMG results confirm the importance of precautionary motives and suggest that current account motives matter only for EMs and LICs and capital account motives matter for all groups while being more important for EMs in both the shortand long runs. The CCEPMG results also point to the importance of taking into account unobserved common factors that affect coefficient estimates and the dynamic process through which reserves adjust to changes. At about 0.6, the speed of adjustment to the long-run equilibrium implies that more than half of the gap between actual and desired reserve holdings is closed within a year.

Job uncertainty and deep recessions

We study a model where households are subject to uninsurable unemployment risk, price setting is subject to nominal rigidities, and the labor market is characterized by matching frictions and inflexible wages. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive. Lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk. Amplification derives from the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession.

External Habit in a Production Economy: A Model of Asset Prices and Consumption Volatility Risk

A standard real business-cycle model with external habit and capital adjustment costs matches a long list of asset price and business-cycle moments: equity, firm value, and risk-free rate volatility; the equity premium; excess return predictability; consumption growth predictability; basic moments of consumption, output, and investment; among others. The model also generates endogenous consumption volatility risk. Precautionary savings motives make consumption sensitive to shocks in bad times, leading to countercyclical volatility, even with homoscedastic technology shocks. Habit acts as countercyclical leverage, which amplifies this channel. Habit also implies high risk aversion, which amplifies the stock price response.Received April 21, 2016; editorial decision February 3, 2017 by Editor Stijn Van Nieuwerburgh.

The Savings Motives: With Special Reference to Households in Kalutara District

The household saving is a decision which is taken by the people to postpone their consumption of current income. Savings can be considered as one of the crucial tools which households utilized to accomplish their financial expectations in order to improve their financial wellbeing. There are many ways of accumulating or investing money, which can be identified as the deposits in bank accounts or building society accounts to saving in pensions, save in credit unions, invest in the stock market and many other saving sources. This study is an inspection of saving motives of Sri Lankan household in present economic situation. Briefly it can be explained, the harvest of the research will provide the answer to the question of what is the most significantly affected saving motive which stimulate/ encourage people to save money? And it will be further declared how do these saving motives vary when household characteristics differ? As a conclusion it can be stated that this study is seeking answers for why do people save money in a broader sense (Research Problem). And the answer for, of what is the most significantly affected saving motive to stimulate people, for savings? The main purpose of this paper is to examine the most significant savings motive among households in Kalutara District. Data were collected through questionnaires by using hundred respondents. The factor analysis is explored to examine, what is the most significant savings motive among pre-determined savings motives of bequest, precautionary and life cycle using SPSS 17. It has been identified the most significant savings motive of households in Kalutara district is the precautionary savings motive.

Trust and Corporate Cash Holdings

We examine the relation between the level of trust in a country and corporate cash holdings. Agency theories predict that shareholders in countries with low levels of societal trust will pressure firms to disgorge cash. Precautionary savings motives predict that firms located in countries with less trusting societies will hoard more cash in order to compensate for reduced access to capital markets. The first theory predicts a positive relation between trust and corporate cash holdings while the second theory predicts a negative relation between these two variables. Using data on firms located in 54 countries around the world we find evidence in favor of the agency theory-based explanation for the relation between trust and corporate cash holdings. Overall, our results highlight the role played by informal institutions in shaping corporate financial management.