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Precautionary Saving

description315 papers
group13 followers
lightbulbAbout this topic
Precautionary saving refers to the practice of setting aside funds to mitigate potential future risks or uncertainties, such as income loss or unexpected expenses. This behavior is driven by individuals' desire to maintain financial stability and security in the face of unpredictable economic conditions.
lightbulbAbout this topic
Precautionary saving refers to the practice of setting aside funds to mitigate potential future risks or uncertainties, such as income loss or unexpected expenses. This behavior is driven by individuals' desire to maintain financial stability and security in the face of unpredictable economic conditions.

Key research themes

1. How do psychological factors like future orientation and risk tolerance influence precautionary saving behavior?

This research area investigates the role of individual psychological characteristics, particularly future time perspective, financial knowledge, and risk tolerance, in shaping saving behaviors aimed at precaution. It matters because these factors directly affect individuals’ proactive saving decisions for retirement or emergencies, thereby influencing long-term financial security and retirement preparedness.

2015, Financial Services Review

Key finding: Identified that higher future time perspective, greater knowledge of retirement planning, and higher financial risk tolerance are positively correlated with increased retirement savings among young working adults. The study...Read more
Key finding: Identified that higher future time perspective, greater knowledge of retirement planning, and higher financial risk tolerance are positively correlated with increased retirement savings among young working adults. The study further found significant interaction effects between these variables, indicating that interventions to promote precautionary saving should be tailored to an individual's psychological profile.

2016

Key finding: Found that financial risk tolerance and health status differently affect saving behaviors between genders, with women’s saving more negatively affected by low risk tolerance and poor health than men’s. These gender-based...Read more
Key finding: Found that financial risk tolerance and health status differently affect saving behaviors between genders, with women’s saving more negatively affected by low risk tolerance and poor health than men’s. These gender-based psychological differences contribute to variations in precautionary saving habits, highlighting the need for gender-sensitive financial education and policy.

2016

Key finding: Demonstrated that precautionary and retirement saving motives significantly increase the likelihood of households saving regularly or irregularly compared to not saving, and that longer-term planning horizons and higher...Read more
Key finding: Demonstrated that precautionary and retirement saving motives significantly increase the likelihood of households saving regularly or irregularly compared to not saving, and that longer-term planning horizons and higher income increase regular saving propensity. Lower risk tolerance decreased regular saving, reaffirming the psychological underpinnings of precautionary saving behaviors.

2016

Key finding: Explored different self-control strategies and mental mechanisms (budgeting, environmental structuring, contingency management) used by individuals to achieve saving goals, especially to overcome impulsivity that impedes...Read more
Key finding: Explored different self-control strategies and mental mechanisms (budgeting, environmental structuring, contingency management) used by individuals to achieve saving goals, especially to overcome impulsivity that impedes precautionary saving. The study provides a conceptual framework explaining how psychological self-regulation tools aid in organizing finances for precautionary saving.

2. What is the impact of liquidity and saving constraints on precautionary saving motivation and behavior?

This theme addresses how external constraints, especially liquidity restrictions and payment deferral options, influence the extent and nature of precautionary saving. Understanding this is crucial for designing financial products and policies to facilitate saving among individuals who face self-control problems or lack access to suitable saving instruments.

2021

Key finding: Showed that offering a wage deferral savings scheme significantly increased short-term savings among agricultural workers, enabling lump sum purchases and home improvements. The study linked this behavior to addressing...Read more
Key finding: Showed that offering a wage deferral savings scheme significantly increased short-term savings among agricultural workers, enabling lump sum purchases and home improvements. The study linked this behavior to addressing self-control problems and a lack of alternative savings options, indicating that liquidity constraints are substantial drivers of precautionary saving strategies.

2023, Journal of Economic Theory

Key finding: Provided an analytical foundation demonstrating that liquidity constraints boost the precautionary saving motive by increasing prudence around binding wealth levels. The paper revealed that constraints and uncertainty both...Read more
Key finding: Provided an analytical foundation demonstrating that liquidity constraints boost the precautionary saving motive by increasing prudence around binding wealth levels. The paper revealed that constraints and uncertainty both induce consumption concavity, which heightens precautionary saving behavior, but additional constraints or risks can paradoxically reduce the motive due to 'hiding' effects.

2025, Economics Letters

Key finding: Derived new sufficient conditions under multiple risks (labor income and interest rate) for precautionary saving without restrictive assumptions on preferences or risk size. This work formalizes how interaction of various...Read more
Key finding: Derived new sufficient conditions under multiple risks (labor income and interest rate) for precautionary saving without restrictive assumptions on preferences or risk size. This work formalizes how interaction of various risks and constraints shapes optimal saving responses, contributing to the theoretical underpinnings of precautionary saving under complex risk environments.

3. How do macroeconomic volatility and external economic factors shape aggregate precautionary saving and net asset positions at the country level?

This theme explores the macroeconomic implications of increased uncertainty on saving behavior, focusing on how macroeconomic volatility influences aggregate precautionary saving motives and international balance sheet positions of countries. This comprehensive approach links micro-level saving behavior to broader economic outcomes relevant for policy and financial stability.

2015

Key finding: Empirically established a strong positive association between increases in country-specific macroeconomic volatility and accumulations in net foreign asset positions for OECD countries. Using a standard open economy model, it...Read more
Key finding: Empirically established a strong positive association between increases in country-specific macroeconomic volatility and accumulations in net foreign asset positions for OECD countries. Using a standard open economy model, it demonstrated that increased uncertainty raises precautionary saving, which in turn drives larger external imbalances through persistent accumulation of foreign assets.

2021

Key finding: Quantified the contribution of precautionary saving to personal saving using household survey data, showing that approximately 20% of total saving in Italy is driven by precautionary motives. The study employed a model...Read more
Key finding: Quantified the contribution of precautionary saving to personal saving using household survey data, showing that approximately 20% of total saving in Italy is driven by precautionary motives. The study employed a model incorporating prudence (convex marginal utility) and demonstrated the relevance of precautionary saving at the macroeconomic level with implications for aggregate saving behavior.

2022, Review of Income and Wealth

Key finding: Tested the link between accumulated wealth and uncertainty from incomplete social security (primarily lack of health insurance) among Mexicans aged 50-75. Found mixed evidence regarding the role of precautionary saving,...Read more
Key finding: Tested the link between accumulated wealth and uncertainty from incomplete social security (primarily lack of health insurance) among Mexicans aged 50-75. Found mixed evidence regarding the role of precautionary saving, suggesting that public safety nets substantially reduce individual precautionary motives, highlighting the interplay between macro social protection mechanisms and personal saving behavior.

Related Topics

All papers in Precautionary Saving

2025

We study the effect of a non-insurable background risk (BGR) on insurance take-up choices over insurable risks made by risk-averse agents under limited liability laws. This economic environment applies, for example, to the consumer’s...more
We study the effect of a non-insurable background risk (BGR) on insurance take-up choices over insurable risks made by risk-averse agents under limited liability laws. This economic environment applies, for example, to the consumer’s decision to purchase medical insurance in the face of non-insurable income risk under limited liability provided by bankruptcy. We consider two types of BGR - a wealth deteriorating risk and a mean-preserving risk. We show that the magnitude of both BGR types has a non-monotonic effect on the rate of uninsured consumers. This is in contrast with the standard monotonic effect of background risk on the demand for insurance, obtained for risk-averse agents under full liability.

2025

This paper explores risk aversion among Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Using households’ share of risky assets, we test whether relative risk aversion is...more
This paper explores risk aversion among Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Using households’ share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using an Euler equation that adjusts for measurement error in consumption data, we estimate the coefficient of relative risk aversion in the CRRA utility function. Point estimates from our preferred non-linear models suggest a moderate degree of risk aversion for the typical Australian household, with values ranging from 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy. JEL Codes: D12, D15, E21

2025, Canadian Journal of Economics

This paper documents the life-cycle patterns of household portfolios in Canada, and investigates several hypotheses about asset accumulation and allocation. Inferences are drawn from the 1999 Survey of Financial Security, with some...more
This paper documents the life-cycle patterns of household portfolios in Canada, and investigates several hypotheses about asset accumulation and allocation. Inferences are drawn from the 1999 Survey of Financial Security, with some comparisons to earlier wealth surveys from 1977 and 1984. I find cross-sectional evidence for asset decumulation at older ages when annuitized assets like pension wealth are included in the analysis. I also find that the portfolio share of financial assets increases sharply with age, while indicators of risk tolerance appear to decrease. This is consistent with families desiring more liquid and less risky assets as they age.

2025, Journal of Economics & Management Strategy

This paper studies sales promotions through coupons in an oligopoly under imperfect price information. Sellers can distribute either ordinary coupons, or coupon-(price) advertising, or both types of coupons, at distant locations to...more
This paper studies sales promotions through coupons in an oligopoly under imperfect price information. Sellers can distribute either ordinary coupons, or coupon-(price) advertising, or both types of coupons, at distant locations to attract consumers from their rivals' markets. A unique symmetric pure strategy equilibrium exists where rebates and couponing intensity are always positive. In the ordinary coupons equilibrium, prices, promotional e®orts and sellers' pro¯ts are higher than in the coupon-advertising equilibrium. However, if sellers are allowed to distribute both types of coupons, only coupon-advertising is sent out in equilibrium.

2025, International Journal of Social Media and Interactive Learning Environments

Poor heath, large acute and long-term care medical expenses and spousal death are significant drivers of impoverishment among retirees. We document these facts and build a rich overlapping generations model that reproduces them. We use...more
Poor heath, large acute and long-term care medical expenses and spousal death are significant drivers of impoverishment among retirees. We document these facts and build a rich overlapping generations model that reproduces them. We use the model to assess the incentive and welfare effects of U.S. Social Security and means-tested social insurance programs, such as Medicaid and food stamp programs, for the aged. We find that U.S. means-tested social insurance programs for retirees provide significant welfare benefits for all newborn. Moreover, when means-tested social insurance benefits are of the scale in the U.S., all newborn prefer that Social Security be removed. Finally, we find that the current scale of means-tested social insurance in the U.S. is about right in the following sense. If we condition on the current Social Security program, the benefits of increasing means-tested social insurance are small or negative.

2025, Review of Economics and Statistics

This article estimates marginal propensities to consume (MPC) out of current and lagged income for U.S. states using panel data regressions that control for time-specific and statelevel fixed effects. The MPCs vary across states, in...more
This article estimates marginal propensities to consume (MPC) out of current and lagged income for U.S. states using panel data regressions that control for time-specific and statelevel fixed effects. The MPCs vary across states, in particular, the MPC out of current income is higher in states where income is more persistent and the MPC out of lagged income is lower in agricultural states. Several models of individual consumer behavior are analyzed and simulated in order to isolate a model which is able to match the estimated MPCs well.

2025, Journal of Monetary Economics

We study the role of habit formation in shaping the amount of precautionary savings and the wealth distribution in heterogeneous agents model economies with idiosyncratic uncertainty. We adjust preferences to equate the Intertemporal...more
We study the role of habit formation in shaping the amount of precautionary savings and the wealth distribution in heterogeneous agents model economies with idiosyncratic uncertainty. We adjust preferences to equate the Intertemporal Elasticity of Substitution in all model economies. We find that habit formation brings a hefty increase in precautionary savings and very mild reductions in the coefficient of variation and in the Gini index of wealth. These findings hold for both persistent and non-persistent habits, with the effects of the former being much larger.

2025, International Economic Review

This paper studies the effect that illiquid assets and collateral credit frictions have on the level of wealth inequality in a standard model of ex-ante heterogenous agents with idiosyncratic uncertainty. We calibrate our model so that...more
This paper studies the effect that illiquid assets and collateral credit frictions have on the level of wealth inequality in a standard model of ex-ante heterogenous agents with idiosyncratic uncertainty. We calibrate our model so that its steady state statistics match selected aggregate statistics of the U.S. economy and data on the earnings distribution. We find that adding illiquid assets and collateral credit frictions decreases wealth inequality decreases slightly relative to an economy with liquid assets and no credit frictions. The effect is small because these frictions mostly affect poor households that account for a small fraction of aggregate wealth. Nevertheless, our richer model allows us to study other dimensions of wealth inequality. In particular, our model replicates the fact that financial assets are more concentrated than total wealth, while residential assets are less concentrated. Furthermore, we document that, in the U.S., the earnings and housing distributions are remarkably similar. Our model can account for this fact so long as the earnings process is fairly persistent

2025, CEPR Discussion Paper No. …

We simulate a buffer stock model of consumption at the individual level, aggregate, and estimate regressions on the aggregated (simulated) data. Regressions of consumption on current (or lagged) disposable labor income-using the simulated...more
We simulate a buffer stock model of consumption at the individual level, aggregate, and estimate regressions on the aggregated (simulated) data. Regressions of consumption on current (or lagged) disposable labor income-using the simulated data-are used to predict the marginal effect of changing persistence of income shocks or changing aggregate uncertainty (variously defined). Next we estimate a time series model-using observed data-for aggregate disposable labor income for each state. The model allows for varying degrees of persistence and for varying degrees of aggregate uncertainty across states. Finally, we estimate aggregate regressions of consumption on current (or lagged) income, allowing the slope in these regression to depend on persistence and or measures of uncertainty. We find that the effect of persistence very strongly corresponds to that predicted from the model, while the impact of our aggregate measures of uncertainty matches the theoretical model less well.

2025

In most developed countries, housing receives preferential tax treatment relative to other assets. In particular (i) the housing services provided by owner-occupied housing (generally referred to as imputed rents) are untaxed and (ii)...more
In most developed countries, housing receives preferential tax treatment relative to other assets. In particular (i) the housing services provided by owner-occupied housing (generally referred to as imputed rents) are untaxed and (ii) mortgage interest payments reduce taxable income. The potential economic distortions resulting from the unique treatment of housing may be substantial, especially in light of the fact that residential capital accounts for more than half of the assets in the U.S. In particular, this tax treatment distorts the households' portfolio composition, their saving rates and their tenure choice. In this paper we build a general equilibrium model populated by heterogeneous agents subject to idiosyncratic risk. We use this framework to quantitatively assess the macroeconomic and distributional distortions introduced by this preferential tax treatment. We also study the effects of alternative tax schemes which could correct the current system's bias. " Correspondence to Maria J. Luengo-Prado at m.luengo0neu.edu. We would like to thank as many people as possible. Diaz thanks the Direccion General de Investigacion, project BEC2001-1653, for financial support. Luengo-Prado is indebted to the DirecciOn General de InvestigaciOn, project BEC2000-0173, for financial support. They both are grateful to the FundaciOn Ramon Areces for financial support. All comments are welcomed.

2025, RePEc: Research Papers in Economics

We prove strict concavity of the value function for liquidity constrained dynamic accumulation models without adopting at least one of the following restrictive assumptions: zero response of productive effort, bounded marginal value of...more
We prove strict concavity of the value function for liquidity constrained dynamic accumulation models without adopting at least one of the following restrictive assumptions: zero response of productive effort, bounded marginal value of accumulated balances, or strictly convex cost of holding accumulated balances. Thus we extend well known theoretical results to more general models of saving with liquidity constraints and of commodity storage with non-negativity constraints on stocks. Our results provide a foundation for estimation of a homogeneous markovian process for consumption in models of saving, or for price in commodity storage models, under more realistic assumptions.

2025, Social Science Research Network

Uninsurable income risk is often cited as an explanation for empirical deviations from the Lifecycle/Permanent-Income Hypothesis such as the observation that the life-cycle pro…le of mean consumption is humpshaped. Most methods used for...more
Uninsurable income risk is often cited as an explanation for empirical deviations from the Lifecycle/Permanent-Income Hypothesis such as the observation that the life-cycle pro…le of mean consumption is humpshaped. Most methods used for estimating income uncertainty essentially measure the cross-sectional variance of a subpopulation rather than the true uncertainty or riskiness perceived by consumers. In this paper, we employ a nonparametric approach to estimate idiosyncratic income uncertainty. We measure income uncertainties as the variance of income forecasting errors at di¤erent ages and over di¤erent time horizons. The estimated life-cycle income uncertainty pro…le is U-shaped and generally implies a lower degree of income uncertainty relative to the previous literature. We subsequently use these nonparametric estimates to calibrate a (time-inconsistent) lifecycle model to assess whether a consumption hump can be generated by precautionary saving given more robust measures of income uncertainty. We show that, with plausible risk aversion coe¢ cient and discounting factors and an endogenous, rarely active borrowing limit, our re…ned measure of income uncertainty is large enough to generate a signi…cant consumption hump that peaks around age 55 and closely matches with the observed magnitude of the consumption hump. We also notice that the variation in the volatility of income shocks with respect to both age and forecast horizon has a signi…cant impact on the size and peak age of the consumption hump. JEL Classi…cation: E21 Keywords: consumption hump, income risk, time-inconsistent expectations, forecasting errors

2025

Farm risk management for income stabilization is on-going issue. An applied work has been performed to measure farm risk using a stochastic model. Risk management tools, with symmetric as well as asymmetric impacts, are then tested and...more
Farm risk management for income stabilization is on-going issue. An applied work has been performed to measure farm risk using a stochastic model. Risk management tools, with symmetric as well as asymmetric impacts, are then tested and compared through ad hoc statistics. Normal farm business risk can be efficiently managed using a precautionary saving provision. Farm revenue insurance is found as the most efficient asymmetric tool for dealing with climatic and market shocks. The linkage between these complementary tools can be adjusted upon market environment. La gestion du risque agricole afin de stabiliser le revenu est un sujet permanent d'analyse. Un modèle stochastique a été réalisé afin de mesurer le risque agricole. Des outils de gestion du risque, avec une démarche de gestion symétrique et asymétrique, ont été modélisés afin d'estimer leur impact et de comparer leur performance. Ainsi, le risque normal peut-il être géré efficacement par une épargne de précaution. L'assurance chiffre d'affaires de l'exploitation agricole peut être considérée comme l'outil le plus performant pour la gestion de chocs climatiques et de marché. La liaison entre ces deux outils peut alors être ajustée en fonction de l'environnement de marché.

2025, International Journal of Banking, Risk and Insurance

Life insurance serves as an important financial instrument, which effectively safeguards the family against adverse financial consequences resulting from an untimely demise of the primary breadwinner. This research paper delves into the...more
Life insurance serves as an important financial instrument, which effectively safeguards the family against adverse financial consequences resulting from an untimely demise of the primary breadwinner. This research paper delves into the factors that impact the purchasing intentions of life insurance among married working professionals. Employing Structural Equation Modelling (SEM), the study analyses the impact of saving motives and financial literacy on life insurance purchasing intentions. The findings suggest that saving motives and financial literacy have a positive and significant effect on the purchase intention of life insurance. Furthermore, the paper demonstrates that incorporating continuous manifest variables enhances the model fit and provides more accurate estimates of the relationships between variables. This provides valuable insights for life insurance providers, enabling them to gain a better understanding of the factors influencing consumers' purchase intentions.

2025

The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We apply the test proposed by to a Spanish panel data set in which households are observed for up to eight...more
The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We apply the test proposed by to a Spanish panel data set in which households are observed for up to eight consecutive quarters. This temporal dimension is crucial, because it allows us to take into account time invariant unobserved heterogeneity across households ('fixed effects') and, therefore, to investigate whether the relationship between current and past consumption reflects habits or heterogeneity. Our results confirm the importance of accounting for fixed effects when analysing intertemporal consumption decisions allowing for time non-separabilities.

2025, Journal of Political Economy

Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source.

2025, Social Science Research Network

We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers' decisions that in theory...more
We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers' decisions that in theory should vary with attitude towards risk. We …nd that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.

2025, Finance and economics discussion series

Uninsurable income risk is often cited as an explanation for empirical deviations from the Lifecycle/Permanent-Income Hypothesis such as the observation that the life-cycle pro…le of mean consumption is humpshaped. Most methods used for...more
Uninsurable income risk is often cited as an explanation for empirical deviations from the Lifecycle/Permanent-Income Hypothesis such as the observation that the life-cycle pro…le of mean consumption is humpshaped. Most methods used for estimating income uncertainty essentially measure the cross-sectional variance of a subpopulation rather than the true uncertainty or riskiness perceived by consumers. In this paper, we employ a nonparametric approach to estimate idiosyncratic income uncertainty. We measure income uncertainties as the variance of income forecasting errors at di¤erent ages and over di¤erent time horizons. The estimated life-cycle income uncertainty pro…le is U-shaped and generally implies a lower degree of income uncertainty relative to the previous literature. We subsequently use these nonparametric estimates to calibrate a (time-inconsistent) lifecycle model to assess whether a consumption hump can be generated by precautionary saving given more robust measures of income uncertainty. We show that, with plausible risk aversion coe¢ cient and discounting factors and an endogenous, rarely active borrowing limit, our re…ned measure of income uncertainty is large enough to generate a signi…cant consumption hump that peaks around age 55 and closely matches with the observed magnitude of the consumption hump. We also notice that the variation in the volatility of income shocks with respect to both age and forecast horizon has a signi…cant impact on the size and peak age of the consumption hump. JEL Classi…cation: E21 Keywords: consumption hump, income risk, time-inconsistent expectations, forecasting errors

2025, Economics Letters

• We find a new sufficient condition for precautionary saving under two risks. • We provide three economic interpretations for this condition. • An interpretation focuses on the marginal effect of saving on total income variance. • An...more
• We find a new sufficient condition for precautionary saving under two risks. • We provide three economic interpretations for this condition. • An interpretation focuses on the marginal effect of saving on total income variance. • An interpretation focuses on the covariance between total income and saving returns. • An interpretation focuses on the effect of saving on the utility premium.

2024, IMF Working Papers

This is a Working Paper and the author(s) would welcome any comments on the present text. Citations should refer to a Working Paper a/the International Monetary Fund. The views expressed are those ofthe author(s) and do not necessarily...more
This is a Working Paper and the author(s) would welcome any comments on the present text. Citations should refer to a Working Paper a/the International Monetary Fund. The views expressed are those ofthe author(s) and do not necessarily represent those of the Fund.

2024, International Economic Review

This paper studies the effect that illiquid assets and collateral credit frictions have on the level of wealth inequality in a standard model of ex-ante heterogenous agents with idiosyncratic uncertainty. We calibrate our model so that...more
This paper studies the effect that illiquid assets and collateral credit frictions have on the level of wealth inequality in a standard model of ex-ante heterogenous agents with idiosyncratic uncertainty. We calibrate our model so that its steady state statistics match selected aggregate statistics of the U.S. economy and data on the earnings distribution. We find that adding illiquid assets and collateral credit frictions decreases wealth inequality decreases slightly relative to an economy with liquid assets and no credit frictions. The effect is small because these frictions mostly affect poor households that account for a small fraction of aggregate wealth. Nevertheless, our richer model allows us to study other dimensions of wealth inequality. In particular, our model replicates the fact that financial assets are more concentrated than total wealth, while residential assets are less concentrated. Furthermore, we document that, in the U.S., the earnings and housing distributions are remarkably similar. Our model can account for this fact so long as the earnings process is fairly persistent

2024, Eastern Economic Journal

We compare the "New Consensus" (NC) in macroeconomics as expounded in Woodford (2003) and the Post-Keynesian (PK) approach regarding the causes of a "liquidity trap" (LT). We argue that in the NC a LT is a phenomenon caused by unusually...more
We compare the "New Consensus" (NC) in macroeconomics as expounded in Woodford (2003) and the Post-Keynesian (PK) approach regarding the causes of a "liquidity trap" (LT). We argue that in the NC a LT is a phenomenon caused by unusually large transitory shocks that depress the "neutral" interest rate temporarily. We show that this is the case because it is assumed that the "neutral" or "natural" interest rate converges in the long run to a gravitation center whose (positive) lower bound is determined by the rate of time preference of the representative household. By contrast, in the PK approach, the economy may also exhibit a "structural" or long-lasting LT even in the absence of large adverse shocks. This may be the case if a combination of high precautionary saving, low investment spending and stringent conditions for access to bank credit stemming from a high degree of uncertainty and liquidity preference makes the sum of the steady-growth "neutral" interest rate and the inflation rate fall short of the term/risk premium on long-term interest rates.

2024, Labour Economics

We draw on three different Dutch data sets: longitudinal wealth data from the SocioEconomic Panel, consumption and income data from the Consumer Expenditure Survey, and subjective data from the CentER data-panel to study the saving...more
We draw on three different Dutch data sets: longitudinal wealth data from the SocioEconomic Panel, consumption and income data from the Consumer Expenditure Survey, and subjective data from the CentER data-panel to study the saving behavior of the elderly. We measure savings as first differences of wealth, by subtracting consumption from income, and by using self-reported data. The analysis from these different angles can shed light on whether the elderly decumulate after retirement. We find some evidence of decumulation, but only at an advanced age. We also find that precautionary savings, bequest motives, and health are among the reasons why some elderly do not decumulate in the pattern predicted by the life-cycle model.

2024, The Review of Economics and Statistics

This article estimates marginal propensities to consume (MPC) out of current and lagged income for U.S. states using panel data regressions that control for time-specific and statelevel fixed effects. The MPCs vary across states, in...more
This article estimates marginal propensities to consume (MPC) out of current and lagged income for U.S. states using panel data regressions that control for time-specific and statelevel fixed effects. The MPCs vary across states, in particular, the MPC out of current income is higher in states where income is more persistent and the MPC out of lagged income is lower in agricultural states. Several models of individual consumer behavior are analyzed and simulated in order to isolate a model which is able to match the estimated MPCs well.

2024

We examine the effects of various new variables relating to uncertainty and find that "social uncertainty" in the form of increased crime is leading to portfolio substitution from bank accounts towards savings in durable goods...more
We examine the effects of various new variables relating to uncertainty and find that "social uncertainty" in the form of increased crime is leading to portfolio substitution from bank accounts towards savings in durable goods and other real assets in a typical low middle income economy of Pakistan. Accounting for the cultural phenomena of savings in gold and non-bank real assets in South Asia, we have modeled macroeconomic uncertainty through both the levels and the volatilities of gold prices and the stock market index, as well as income volatility. We find that higher social and macroeconomic uncertainty leads to larger precautionary savings in non-bank assets and thereby results in lower residual savings in the National Income Accounts; this result is robust and invariant to various measures of uncertainty. We also find support for the permanent income life cycle hypothesis and "weak form" evidence for Ricardian equivalence.

2024, Review of Economics of the Household

By reducing risk of large out-of-pocket medical expenses, comprehensive social health insurance may reduce households' motivation to engage in precautionary behaviors such as saving, procurement of private insurance, and spousal...more
By reducing risk of large out-of-pocket medical expenses, comprehensive social health insurance may reduce households' motivation to engage in precautionary behaviors such as saving, procurement of private insurance, and spousal labor-force participation. We use the natural experiment provided by the 1995 introduction of National Health Insurance in Taiwan to examine these effects, using pre-existing differences in access to health insurance (tied to the household head's and spouse's joint employment status) to identify the effects of increasing insurance coverage. We find that comprehensive health insurance has a statistically significant and large effect on household savings, but no significant effects on purchase of private accident insurance and spousal employment.

2024, Quantitative Finance

In this paper we show that ‡exible probability distribution functions, in addition to been able to capture stylized facts of …nancial returns, can be used to identify pure higher-order e¤ects of investors' optimizing behavior. We employ...more
In this paper we show that ‡exible probability distribution functions, in addition to been able to capture stylized facts of …nancial returns, can be used to identify pure higher-order e¤ects of investors' optimizing behavior. We employ the …ve-parameter weighted generalized beta of the second kind distribution-and other density functions nested within it-to determine the conditions under which risk averse, prudent and temperate agents are diversi…ers in the standard portfolio choice theory. Within this framework, we illustrate through comparative statics the economic signi…cance of higher-order moments in return's distributions.

2024, The Review of Economics and Statistics

We study the effect of income uncertainty on consumption in a model that includes precautionary saving. In contrast to previous studies, we focus on time-series variation in income uncertainty. Our time-series measure of income...more
We study the effect of income uncertainty on consumption in a model that includes precautionary saving. In contrast to previous studies, we focus on time-series variation in income uncertainty. Our time-series measure of income uncertainty is constructed from a panel of forecasts. We find evidence of precautionary saving in that increases in income uncertainty are related to increases in aggregate rates of saving. We also find evidence that anticipated income growth rates have less explanatory power for consumption growth rates after conditioning on income uncertainty. The evidence indicates the presence of forward-looking consumers who gradually adjust precautionary savings in response to changing income uncertainty.

2024, Applied Economics

The costs and benefits of subsidized microfinance are still controversial. We utilize a costfunction estimation approach that accounts for the double bottom line (social and financial) of microfinance institutions (MFIs) to evaluate how...more
The costs and benefits of subsidized microfinance are still controversial. We utilize a costfunction estimation approach that accounts for the double bottom line (social and financial) of microfinance institutions (MFIs) to evaluate how subsidies affect both cost efficiency and risk of mission drift. We control for endogenous self-selection into the business models of credit-only versus credit-plus-deposit. Our results suggest that MFIs that both supply loans and collect deposits need no subsidies to be cost-efficient. In addition, subsidies to these MFIs are associated with an increase in deposit size, which might hurt the most disadvantaged depositors. In sum, combining subsidized funds from donors with deposits increases the risk of mission drift, and can therefore be socially undesirable.

2024, Social Science Research Network

Recent fiscal interventions have raised concerns about US public debt, future distortionary tax pressure, and long-run growth potential. We explore the long-run implications of public financing policies aimed at shortrun stabilization...more
Recent fiscal interventions have raised concerns about US public debt, future distortionary tax pressure, and long-run growth potential. We explore the long-run implications of public financing policies aimed at shortrun stabilization when: (i) agents are sensitive to model uncertainty, as in Hansen and Sargent (2007), and (ii) growth is endogenous, as in Romer (1990). We find that countercyclical deficit policies promoting shortrun stabilization reduce the price of model uncertainty at the cost of significantly increasing the amount of long-run risk. Ultimately these tax policies depress innovation and long-run growth and may produce welfare losses.

2024, SSRN Electronic Journal

An Expected Utility maximizer can be risk neutral over a set of nondegenerate multivariate distributions even though her NM (von Neumann Morgenstern) index is not linear. We provide necessary and su¢ cient conditions for an individual...more
An Expected Utility maximizer can be risk neutral over a set of nondegenerate multivariate distributions even though her NM (von Neumann Morgenstern) index is not linear. We provide necessary and su¢ cient conditions for an individual with a concave NM utility to exhibit risk neutral behavior and characterize the regions of the choice space over which risk neutrality is exhibited. The least concave decomposition of the NM index introduced by Debreu [3] plays an important role in our analysis as do the notions of minimum concavity points and minimum concavity directions. For the special case where one choice variable is certain, the analysis of risk neutrality requires modi…cation of the Debreu decomposition. The existence of risk neutrality regions is shown to have important implications for the classic consumptionsavings and representative agent equilibrium asset pricing models.

2024, International Tax and Public Finance

This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted...more
This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted intertemporal utilities, but also exponentially discounted commitment utilities. This finding implies that both consumers and the government can have incentives to adopt tax policies against present-biased decisions. All the results are shown in a three-period model with general utility and production functions. A steady-state analysis indicates that the proposed tax policy is effective in recovering the welfare/capital loss due to consumers' present bias. Keywords Present bias • Hyperbolic discounting • Pareto-improving tax policies • Long-term perspective preferences • Steady-state analysis JEL Classification E03 • E21 • H21 This paper was presented at the 2017 Asian Meeting of the Econometric Society (Hong Kong). An earlier version of this paper circulated under the title of "Present bias and Pareto-improving tax policies." The author is grateful to Lei Sandy Ye, Lei Wang, Xiao Wei, the anonymous referee and editor Ronald Davies for their helpful comments. The author acknowledges the research support from Nanyang Technological University (NTU) AcRF Tier-1 Grant (RG62/18).

2024, International Tax and Public Finance

This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted...more
This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted intertemporal utilities, but also exponentially discounted commitment utilities. This finding implies that both consumers and the government can have incentives to adopt tax policies against present-biased decisions. All the results are shown in a three-period model with general utility and production functions. A steady-state analysis indicates that the proposed tax policy is effective in recovering the welfare/capital loss due to consumers' present bias. Keywords Present bias • Hyperbolic discounting • Pareto-improving tax policies • Long-term perspective preferences • Steady-state analysis JEL Classification E03 • E21 • H21 This paper was presented at the 2017 Asian Meeting of the Econometric Society (Hong Kong). An earlier version of this paper circulated under the title of "Present bias and Pareto-improving tax policies." The author is grateful to Lei Sandy Ye, Lei Wang, Xiao Wei, the anonymous referee and editor Ronald Davies for their helpful comments. The author acknowledges the research support from Nanyang Technological University (NTU) AcRF Tier-1 Grant (RG62/18).

2024, RePEc: Research Papers in Economics

, and many supportive friends and helpful seminar participants. All errors, of course, are my o wn. 2 This paper comprises the core sections of my dissertation, Costain (Aug. 1997).

2024, RePEc: Research Papers in Economics

We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy...more
We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusually long unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers' aggregate consumption, and most of the welfare cost of business cycles.

2024, Journal of Monetary Economics

We study the role of habit formation in shaping the amount of precautionary savings and the wealth distribution in heterogeneous agents model economies with idiosyncratic uncertainty. We adjust preferences to equate the Intertemporal...more
We study the role of habit formation in shaping the amount of precautionary savings and the wealth distribution in heterogeneous agents model economies with idiosyncratic uncertainty. We adjust preferences to equate the Intertemporal Elasticity of Substitution in all model economies. We find that habit formation brings a hefty increase in precautionary savings and very mild reductions in the coefficient of variation and in the Gini index of wealth. These findings hold for both persistent and non-persistent habits, with the effects of the former being much larger.

2024

In the tradition of Irving Fisher, the current article advocates an approach to dynamic programming that is based upon elementary aggregating functions where current action and future expected payoff combine to yield overall current...more
In the tradition of Irving Fisher, the current article advocates an approach to dynamic programming that is based upon elementary aggregating functions where current action and future expected payoff combine to yield overall current payoff. Some regularity properties are provided on the aggregator which allow for establishing the existence, the uniqueness and the computation of the Bellman equation. Some order-theoretic foundations for such aggregators are also established. The aggregator line of argument encompasses and generalizes many previous results based upon additive or non-additive recursive payoff functions.

2024, SSRN Electronic Journal

At least one co-author has disclosed additional relationships of potential relevance for this research. Further information is available online at NBER working papers are circulated for discussion and comment purposes. They have not been...more
At least one co-author has disclosed additional relationships of potential relevance for this research. Further information is available online at NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

2024

This paper examines the effects of households' shocks on saving behaviour. It investigates the possibility that households save ex ante to buffer against adverse weather and health shocks. The relatively high prevalence rate of HIV/AIDS...more
This paper examines the effects of households' shocks on saving behaviour. It investigates the possibility that households save ex ante to buffer against adverse weather and health shocks. The relatively high prevalence rate of HIV/AIDS in Kenya combined with rain fed agriculture implies great uncertainty for rural livelihoods. Adopting a methodology previously used on cross-sectional data (Paxson, 1992), the paper examines the level of households precautionary behaviour. This is done by estimating the marginal propensity to save out of transitory income over a period of 18 months. The results show that while households may exhibit some level of prudence, the marginal propensity to save out of transitory income is about a third of what the permanent income hypothesis postulates. Seasonality influences prudence behaviour, with stressful seasons likely to depress substantially the level of precautionary saving. The presence of HIV/AIDS illness lowers savings and raises per capita consumption. While reduced savings may seem to jeopardize future investments, the rise in consumption when the human asset is threatened, is in accordance with behaviour of forward-looking agents when future income is endogenous to current asset shock. The desire to smooth the health (asset) stock outweighs the desire (ability) to smooth future consumption and therefore savings decline. As a consequence, consumption for the HIV-afflicted households is relatively more volatile. While these findings are in agreement with a buffer stock model, they go against previous predictions that, AIDS medical costs will be met by reducing both consumption and savings in a balanced manner, and not necessarily be drawn disproportionately from own savings. A rise in consumption and a drop in savings may be a signal that the relationship is likely to be disproportionate.

2024, Social Science Research Network

We consider a formal approach to comparative risk aversion and applies it to intertemporal choice models. This allows us to ask whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman [15], Selden...more
We consider a formal approach to comparative risk aversion and applies it to intertemporal choice models. This allows us to ask whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman [15], Selden [26], Epstein and Zin [9] and Quiggin [24] are well-ordered in terms of risk aversion. Moreover, opting for this model-free approach allows us to establish new general results on the impact of risk aversion on savings behaviors. In particular, we show that risk aversion enhances precautionary savings, clarifying the link that exists between the notions of prudence and risk aversion.

2024, Social Science Research Network

Using a sample of U.S. firms over the period, 1984 to 2013, this study examines the relation between market and book leverage ratios. Unlike Welch (2004) who contends that changes in market leverage do not induce adjustments in book...more
Using a sample of U.S. firms over the period, 1984 to 2013, this study examines the relation between market and book leverage ratios. Unlike Welch (2004) who contends that changes in market leverage do not induce adjustments in book leverage, we find an asymmetric effect. That is, firms adjust their book leverage only when the changes in market leverage are due to increases in equity values. No adjustment is observed when firm equity values decrease. Our results are consistent with Myers (1977) and Barclay et al. (2006) who argue that optimal debt levels decrease with corporate growth opportunities.

2024, The Review of Economics and Statistics

The material cannot be used for any other purpose without further permission of the publisher and is for private use only. There may be differences between this version and the published version. You are advised to consult the publisher's...more
The material cannot be used for any other purpose without further permission of the publisher and is for private use only. There may be differences between this version and the published version. You are advised to consult the publisher's version if you wish to cite from it.

2024, Journal of Population Economics

We put forward a method for estimating discount rates using wealth and income data. We build consumption from these data using the budget constraint. Consumption transitions yield discount rates by household groups. Applying this...more
We put forward a method for estimating discount rates using wealth and income data. We build consumption from these data using the budget constraint. Consumption transitions yield discount rates by household groups. Applying this technique to a sample of older households, we find a similar distribution to those previously estimated using field data, though with a much lower mean than those found using experiments. Surprisingly, among this older population, patience is negatively correlated with education and numeracy. This goes against the positive correlation found for younger populations in experiments and some field studies. We discuss potential explanations for this result.

2024, The Geneva Papers on Risk and Insurance Theory

This paper examines the three main tools of risk management in a setting where reliability cannot be guaranteed. Thus, for example, insurers might be insolvent, sprinkler systems might be inoperative and alarm systems might be faulty....more
This paper examines the three main tools of risk management in a setting where reliability cannot be guaranteed. Thus, for example, insurers might be insolvent, sprinkler systems might be inoperative and alarm systems might be faulty. These types of nonreliability are shown to have significant consequences for risk management. In particular, the relationships between increased risk aversion and the use of the various risk management tools do not carry over from models with full reliability. Moreover, the well-known result of Ehrlich and Becker, that market insurance and selfinsurance are substitutes, is shown to fail in the presence of nonreliability risk.

2024, Journal of International Money and Finance

Oil-exporting countries usually experience large current account improvements following a sharp increase in oil prices. In this paper, we investigate this oil price-current account relationship on a sample of 27 oil-exporting economies....more
Oil-exporting countries usually experience large current account improvements following a sharp increase in oil prices. In this paper, we investigate this oil price-current account relationship on a sample of 27 oil-exporting economies. Relying upon the estimation of panel smooth transition regression models over the 1980-2010 period, we provide evidence that refines the traditional interpretation of oil price effects on current accounts. While current accounts are positively affected by oil price variations, this effect is nonlinear and depends critically on the degree of financial development of oil-exporting economies. More specifically, oil price variations exert a positive impact on the current account position for less financially developed countries, while this influence tends to diminish when the degree of financial deepness augments.

2024, Journal of Developing Areas

This paper examines the impact of both exogenous idiosyncratic and covariate shock events on the consumption of farm households in rural Nigeria by using an ordinary least square method. The result of the overall sample shows that whilst...more
This paper examines the impact of both exogenous idiosyncratic and covariate shock events on the consumption of farm households in rural Nigeria by using an ordinary least square method. The result of the overall sample shows that whilst idiosyncratic and climatic shock have no significant effect on household consumption, price shocks are having a significant negative impact on household consumer. By disaggregating the sample into poor and nonpoor households the result suggests that that the non-poor households are able to adequately insure against the effect of idiosyncratic shocks as well as the climatic shock on their consumption while the poorer ones had not been able to insure against the effect of shocks related to death, livestock loss, climate change and price changes on their consumption. This suggests that the farm households should be provided with an adequate and effective social protection measures that would mitigate the effect of shocks on their welfare.
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