1/2003

The Savings Behavior of East and West Germans -Theoretical Predictions and Empirical Evidence

Nicola Fuchs–Schündeln, Matthias Schündeln

We analyze whether the savings behavior of East and West Germans after German reunification can be explained by predictions from a life cycle consumption model. The life cycle hypothesis gives predictions for consumption and savings over the life cycle for a given expected income profile, taking retirement into account. Yet, for the East German population the economic environment changed dramatically and unexpectedly after German reunification, causing a reassessment of life cycle income and risk. In an empirical analysis , we find that the differences in savings behavior of East and West German age cohorts are in line with the life cycle hypothesis.

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