Faculty of Economics and Business Administration Publications Database

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

Volume: 98
Number: 5
Pages: 1798 - 1828
Month: December
ISSN-Print: 0002-8282
Link External Source: Online Version
Year: 2008
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.