Abstract: Recent empirical work on the strength of precautionary saving
has yielded widely varying conclusions. The mixed findings may
reflect a number of difficulties in proxying uncertainty, executing
instrumental variables estimation, and incorporating theoretical
restrictions into empirical models. For each of these problems,
this paper uses existing best-practice techniques and some new
strategies to relate unemployment probabilities from the
Current Population Survey to net worth data from the Survey of
Consumer
Finances. We find that increases in unemployment risk do not boost
saving by households with relatively low permanent income, but that a
statistically significant precautionary effect emerges for households
at a moderate level of income. This finding is robust to certain
restrictions on the sample, but not robust across measures of wealth:
We generally find a significant precautionary motive in broad measures
of wealth that include home equity, but not in narrower subaggregates
comprised only of financial assets and liabilities.
Keywords: Precautionary saving, life-cycle consumption under uncertainty, wealth accumulation
Full paper (437 KB PDF)
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Last update: April 30, 1999
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