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American Economic Review: Vol. 98 No. 5 (December 2008)

AER Volume. 98, Issue 5 | Previous ArticleNext Article

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The Response of Household Saving to the Large Shock of German Reunification

Article Citation

Fuchs-Schundeln, Nicola. 2008. "The Response of Household Saving to the Large Shock of German Reunification." American Economic Review, 98(5): 1798-1828.

DOI: 10.1257/aer.98.5.1798

Abstract

German reunification was a large, unexpected shock for East Germans. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. I derive three stylized features concerning the saving behavior of East versus West Germans after reunification: (i) East Germans have higher saving rates than West Germans; (ii) this East-West gap is increasing in age at reunification; and (iii) for every cohort, this gap is declining over time. I show that a comprehensive life-cycle model can replicate these features. The precautionary saving motive is essential for the success of the model. (JEL D14, D91, E21)

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Authors

Fuchs-Schundeln, Nicola (Harvard U)

JEL Classifications

D14: Personal Finance
D91: Intertemporal Consumer Choice; Life Cycle Models and Saving
E21: Macroeconomics: Consumption; Saving; Wealth
R23: Urban, Rural, and Regional Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics