Precautionary Saving and Aggregate Demand Warwick. Edouard Challe Acknowledges Financial Support from Investissements D'avenir (anr-11-idex-0003/labex Ecodec/anr-11-labx-0047) and Chaire Fdir. Xavier Ragot Acknowledges Financial Support from the European Com- Mission – Fp7-612796 Macfinrobods. Juan

We formulate and estimate a tractable macroeconomic model with time-varying precautionary savings. We argue that the latter affect aggregate fluctuations via two main channels: a stabilizing aggregate supply effect working through the supply of capital; and a destabilizing aggregate demand effect generated by a feedback loop between unemployment risk and consumption demand. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and the 1990–1991 recession. In contrast, the supply effect at least offset the demand effect during the 2001 recession. How do fluctuations in households' precautionary wealth contribute to the propagation of aggregate shocks? In this paper, we attempt to answer this question by formulating and estimating a tractable structural macroeconomic model in which the precautionary motive for holding wealth is operative and its quantitative impact on the business cycle can be precisely evaluated. (IAE), the " Programa de Excelencia en Educacion e Investigacion " of the Bank of Spain, and the Spanish ministry of science and technology Ref. ECO2011-30323-c03-01. The views expressed herein are those of the authors and should not be interpreted as reflecting those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, the Banque de France, the Eurosystem, or OFCE.

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