Macroeconomics
International Finance

Macroeconomics
International Finance
International Trade

May, 2001 (Oral) Macroeconomics, International Economics (both with distinction)
May, 2000 (Written) Microeconomic and Macroeconomic Theory

Aggregate Implications of Household Savings Behavior: Theoretical Analyses with Empirical Evidence from the German Reunification "Experiment"

Professor Giuseppe Moscarini
Professor Eduardo Engel
Professor George Hall

May 2004

M.Phil. (2001), Department of Economics, Yale University
M.A. (2000), Department of Economics, Yale University
Diplom (1999), Latin American Studies, University of Cologne (Germany)
Diplom (1998), Economics, University of Cologne (Germany), with distinction

Doctoral Fellowship of the German National Merit Foundation, 2003-2004
Social Science Research Council Predissertation Fellowship, 2002-2003
Ryoichi Sasakawa Fellowship, 2002
John Perry Miller Award, Yale University, 2002 and 2003
Cowles Foundation Prize, Yale University, 2000 and 2001
European Recovery Program Scholarship of the German Ministry of Trade and Commerce, 1999-2001
Yale University Graduate Fellowship, 1999-2003
Fellowship of the German National Merit Foundation, 1996-1998
German Academic Exchange Service (DAAD) scholar, 1995

Recipient of the Raymond Powell Teaching Prize for the 2001-2002 academic year, Yale University
Teaching Assistant, Graduate Macroeconomics, Yale University, 2001
Teaching Assistant, Macroeconomics/Growth Theory, University of Cologne, 1998 and 1999

Assistant to the Editors, Brookings Institution, Washington D.C., 2002 and 2003
Summarized general discussion for the Brookings Papers on Economic Activity 2/2002 and 1/2003.

Summer Intern, International Monetary Fund, Washington D.C., 2001
Pursued empirical research on financial and macroeconomic consequences of stock market liberalizations. Presented paper in IMF Institute seminar series, October 2001.

Summer Intern, Organisation for Economic Co-operation and Development (OECD), Paris, 2000
Performed an econometric analysis about the Euro equilibrium exchange rate.

Research Assistant, University of Cologne, Department of Economics, 1997-1999
Participated in various projects in monetary economics, international finance, international trade, and European monetary integration.

Intern, ifo Institute of Economic Research, Munich, 1996
Conducted research about the "Tequila-effect" in Latin America, focusing on Argentina and Brazil.

Intern, HWWA Institute of Economic Research, Hamburg, 1996
Assisted in a study about the influence of institutional investors on the stock markets in emerging economies.

Research Assistant, Institute of Social Research and Politics, Cologne, 1995-1996
Contributed to study about children of addicted parents by preparing and evaluating a survey.

Intern, Savings Bank of Tucumán, Argentina, 1995
Assisted in credit evaluations in the Department of Microcredit for Small and Medium Enterprises.

Summer Associate, McKinsey & Company, Cologne, 1998
Developed a strategy for a trading company

"Precautionary Savings and Self-Selection - Evidence from the German Reunification 'Experiment'" (with Matthias Schündeln), mimeo, Yale University, 2003. [job market paper]

"Adjustment to a Large Shock: Do Households Smooth Low Frequency Consumption?", mimeo, Yale University, 2003.

"Welfare Loss and Precautionary Savings Due to Uninsured Idiosyncratic Labor Risk", mimeo, Yale University, 2003.

"Stock Market Liberalizations: Financial and Macroeconomic Implications" (with Norbert Funke), forthcoming in Review of World Economics (Weltwirtschaftliches Archiv), 139(4), 2003; also available as IMF Working Paper, 01/193, December 2001.

"The Savings Behavior of East and West Germans - Theoretical Predictions and Empirical Evidence" (with Matthias Schündeln), Journal of Applied Social Science Studies (Schmöllers Jahrbuch), 123(1), 2003, 209-220.

"L'insoutenable légèreté de l'euro" (with Laurence Boone, Alain de Serres and Vincent Koen), Economie Internationale, 88(4), 2002, 77-106; also available as OECD Economics Department Working Paper, No. 298, June 2001, "Tracking the Euro".

"Argentina and Brazil: Economic Reforms in the Presence of Volatile Capital Flows" (in German, with Thomas Röhm), ifo Schnelldienst, 25-26, 1996, 33-43.

NBER Summer Institute, Boston, July 21-25, 2003.
Third Villa Mondragone Workshop in Economic Theory and Econometrics, Rome, Italy, July 2-4, 2003.
Fellows’ Conference of the Social Science Research Council Program in Applied Economics, Santa Cruz, May
   15-18, 2003.
Annual Meeting of the German Economic Association, Innsbruck, Austria, September 17-20, 2002.
5th International Conference of German Socio-Economic Panel Users, Berlin, Germany, July 3-4, 2002

Summer Institute in Behavioral Economics, Berkeley, 2002.
Social Science Research Council Program in Applied Economics Workshop, Virginia, 2000.

German: native; English and Spanish: fluent; French: intermediate; Portuguese: some reading and speaking skills

This dissertation investigates the aggregate implications of household saving behavior in the absence of complete insurance markets for labor income risk. The first two chapters exploit the "natural experiment" of the German reunification, a largely unanticipated event of unusual proportions for a developed country. The reunification offers a unique opportunity to address well-known but so far insoluble problems encountered in empirical studies of households’ motives for saving. The first chapter deals with the most severe limitation of existing empirical studies of precautionary savings, namely the possibility of a self-selection bias. As more risk-averse individuals save more when facing uninsured labor income risk, but are also more likely to choose occupations with low income risk, estimates of the importance of the precautionary saving motive are likely to be biased. Institutional features of the German labor markets before and after the reunification allow to quantify, for the first time, the size of the bias, and to obtain more reliable estimates of the importance of precautionary savings. The second dissertation chapter exploits again the German reunification to test the relative importance of different potential life cycle savings motives. I derive certain stylized facts regarding the saving behavior of East and West Germans after the German reunification, and analyze which consumption theory is potentially able to explain the observed patterns. The last chapter of the dissertation deals with the welfare effects of idiosyncratic labor income shocks, taking into account variable labor supply as an additional mechanism for self-insurance. I find that the welfare effects of idiosyncratic shocks can be potentially larger than previously assessed.

The first chapter, Precautionary Savings and Self-Selection: Evidence from the German Reunification 'Experiment' (joint with Matthias Schündeln), combines particular features of the German civil service with the event of the German reunification to test the theory of precautionary savings. Specifically, we aim to quantify the importance of self-selection into occupations due to differences in risk aversion. In the presence of this type of self-selection, failing to control for risk aversion in empirical tests of the theory of precautionary savings will result in a bias that could lead to a false rejection of the theory. Our approach deals with the two principal problems of empirical studies of precautionary savings. First, we identify an occupational group, the civil servants, facing an observable income risk that is significantly lower than that of the rest of the population, due to institutional reasons. Second, in our main contribution to the literature, we are able to demonstrate the importance of self-selection by using the German reunification 'experiment'. We exploit the fact that for people from the former German Democratic Republic (GDR) the German Reunification in 1990 caused an exogenous reassignment of income risks to different occupational groups. This allows us to treat their occupation as exogenous and uncorrelated with risk aversion. We find that the households whose main income earner is a civil servant have significantly lower wealth holdings than other households, even in the presence of self-selection. The implied size of precautionary wealth is economically significant, namely 13% of total wealth. More importantly, we show that in the subsample for which we can assume absence of self-selection, precautionary wealth accounts for 21% of total wealth. This difference suggests that risk aversion is a significant factor in occupational choice. Self-selection of risk averse individuals into low-risk occupations is economically important and decreases the total amount of precautionary wealth holdings. Neglecting to account for the self-selection bias could lead to misleading policy recommendations.

In the second chapter, Adjustment to a Large Shock: Do Households Smooth Low Frequency Consumption?, I test the relative empirical relevance of various consumption theories using the German Reunification. It is largely agreed upon that consumption over the life cycle follows rational rules. However, it is unclear which of several competing life cycle saving and consumption motives is the most important one, since most studies rely on explaining the observed comovement of income and consumption over the life cycle and might suffer from omitted variable biases. The German reunification was a large enough shock to influence low frequency consumption behavior. For East Germans, the reunification signified a large shock to labor and retirement income, as well as to wealth levels. Different theoretical models give unique predictions about the resulting saving behavior of different birth cohorts. West Germans serve as a control group for analyzing the saving behavior of East Germans. The identification of my estimates is driven by the exogenous variations, due to the shock, of the net present value of income for people at different stages of their life cycles. In my empirical work, I identify three stylized facts concerning the saving behavior of East vs. West Germans: (i) East Germans save more than West Germans after the reunification, (ii) the East-West gap in saving rates is increasing in the age of the birth cohort, and (iii) the gap is declining over time. In my theoretical work, I study which consumption theories can reproduce these three stylized facts. The candidate theories are: saving for retirement, precautionary saving, habit formation, consumption of durable goods, demographics, and rule of thumb behavior. I find that the precautionary saving model is robustly able to generate the three stylized facts, and conclude that the data gives strong evidence in favor of this model. I can clearly reject rule of thumb behavior in my sample. Changes in the family composition over the life cycle do not seem to play an important role in determining the saving rate behavior. There is only very weak evidence in favor of a habit formation model.

The third chapter, Welfare Loss and Precautionary Savings Due to Uninsured Idiosyncratic Labor Risk, analyzes theoretically the welfare effects of uninsured idiosyncratic labor shocks in a general equilibrium heterogeneous agents model with incomplete markets. In contrast to other studies, I endogenize the amount of hours worked in the state of employment. The resulting size of precautionary savings is small compared to the partial equilibrium literature, yet I find that the welfare losses from these labor shocks, as measured by the equivalent variation in consumption, are large, namely 2.2% to 5.3% of total consumption. Endogenizing labor supply changes considerably the welfare implications of idiosyncratic shocks.