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Pá 20.03.2015

Prof. Nicos Christodoulakis (Athens U. of Econ. and Bus.) “Precautionary Savings and Debt Stabilization in the Euro Area”

Prof. Nicos Christodoulakis

Athens University of Economics and Business, Greece

Author: Nicos Christodoulakis

Abstract: The interactions between debt stabilization and precautionary savings in the Euro Area are analyzed by using a square-root Ornstein-Uhlenbeck stochastic process with mean-reverting income to capture the dynamics and constraints inflicted upon households by the crisis. Austerity programs are modeled as an additional Poisson process to reflect the abrupt implementation and their large effect on households’ uncertainty and precautionary savings. A closed-form approximation of the savings function is derived and then it is used to analyze the recessionary impact of austerity policies currently implemented in the Euro Area. A more gradual consolidation is found to be relaxing the precautionary motive, thus resulting in less depressed consumption and output.

JEL Classification: C02, D14, E62, H60, H61

Keywords: Debt; precautionary savings; fiscal policy; Brownian motion; Euro Area.

Full Text:  “Precautionary Savings and Debt Stabilization in the Euro Area”