The Response of Household Saving to the Large Shock of German Reunification
American Economic Review · 2008 · Volume 98 · Issue 5
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)
Keywords
Personal Finance, Intertemporal Consumer Choice, Life Cycle Models and Saving, Macroeconomics: Consumption, Saving, Wealth, Urban, Rural, and Regional Economics: Regional Migration, Regional Labor Markets, Population, Neighborhood Characteristics
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