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Cambridge Finance Workshop - Edouard Challe

Cambridge Finance Workshop Series are usually held on Thursdays during term time. The workshops are an opportunity for those working in finance to present their latest results or papers.
When Mar 05, 2015
from 01:00 PM to 02:00 PM
Where Cambridge Judge Business School, Room W4.06
Contact Name
Contact Phone 01223768129
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This seminar is arranged in collaboration with INET.
M. Edouard Challe is a CNRS researcher and associate professor of Economics at Ecole Polytechnique.

The title of the talk is "Precautionary saving and aggregate demand"


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 model of the business cycle with incomplete insurance against idiosyncratic risk, nominal frictions, and involuntary unemployment. Time-variations in precautionary wealth have two conflicting effects on output volatility: a stabilizing “aggregate supply” effect working through the supply of capital and potential output; and a destabilizing “aggregate demand effect” working through aggregate consumption and the output gap. We quantify these forces via a maximum-likelihood estimation of the structural parameters of the model, using as observables both aggregate and cross-sectional information (such as the extent of consumption insurance and the distributions of wealth and consumption across households). We find the impact of demand shocks on aggregates to be significantly altered by time-varying precautionary savings.

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