Precautionary saving and economic growth

The standard neoclassical growth model is modified to study the growth path of an economy where consumers save to protect themselves against idiosyncratic risks. It is found that in our general equilibrium model the effects of precautionary saving are greater than those found by previous studies that treat both wages and the interest rate as exogenous. The study of the dynamic properties of the model reveals that when there is a high degree of uncertainty, there is no steady-state equilibrium and that any growth path must be nonmonotonic.