Job Market Paper

Precautionary Saving and the Transmission of Monetary Policy



A majority of households in the US does not hold interest bearing assets and their savings behavior  is  countercyclical. Using the Survey of Consumer Finances I document precautionary saving in the economy using a new measure, {\it checking account balance to income} ratio. I find that (a) medium scale NK models with a precautionary saving motive can match this ratio well; (b) precautionary saving diminishes the direct effect of monetary policy; (c) the precautionary saving mechanism leads to lower inflation during economic recoveries; and (d) an extension with downward rigid wages is able to produce an asymmetric response to monetary policy in line with the recent literature.


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