Quantifying Borrowing Constraints and Precautionary Savings

This paper quantifies the effects of precautionary saVIngs In a dynamic stochastic general equilibrium model. I show that Zeldes\u27s estimate [14] of the excess consumption growth for low asset holders is consistent with an incomplete market model when a borrowing constraint point is set at three months\u27 worth of average wage income. The hypotheses of no-borrowing specification and solvency-constraint specification are rejected by a test distribution derived from the stationary equilibrium distribution. At the estimated borrowing constraint, an increase in endowment shock within the range of empirical findings can cause 1.2% increase in saving rate and 10% increase in capital