Public and Private Saving and the Long Shadow of Macroeconomic Shocks

The global crisis of 2008-9 and the ongoing Euro crisis raise many questions regarding the long-term response to crises. We know that households that lost access to credit, for example, were forced to adjust and increase saving. But, will households remain bigger savers than they would have been had the global financial crisis not occurred? And for how long will this increased saving persist? We also ask similar questions about the public sector 's saving decisions. We hypothesize that it is only dramatic shocks that have a long-lasting effect on saving behavior. For a sample of 23 high-income countries, we examine the impact of catastrophic shocks from 1900 onward (defined as a time period in which the cumulative decline in per capita income was larger than 10 percentage points) on patterns of saving during 1980-2010. We find evidence consistent with history-dependent dynamics: more experience of past crises tends to increase savings among households, but lead to decreased public sector saving. This decrease in public saving, however, is about 1/3 in magnitude than the corresponding increase in private/household saving. We follow up on these findings with an investigation of the importance of historical exposure for current account dynamics, but find no strong indication that our measure of past exposure is important to the current account 's determination. We conclude by examining the likely impact of the 2008-9 GFC on future saving.