Precautionary Saving: An Explanation for Excess Sensitivity of Consumption
AbstractThe permanent income hypothesis under certainty equivalence yields a martingale consumption process. Empirically, this hypothesis is rejected because consumption is excessively sensitive to anticipated income. One approach to account for excess sensitivity is to relax certainty equivalence by using utility functions that induce precautionary saving. This article analyzes a hyperbolic absolute risk-aversion utility function. Empirically, some reasonable parameterizations of this specification allow one to match the excess sensitivity associated with the data. Also, these parameterizations permit one to account for the excess smoothness problem. However, excess sensitivity and excess smoothness do not reflect the same phenomenon.
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Bibliographic InfoArticle provided by American Statistical Association in its journal Journal of Business and Economic Statistics.
Volume (Year): 12 (1994)
Issue (Month): 2 (April)
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Other versions of this item:
- Michel Normandin, 1992. "Precautionary Saving: An Explanation for Excess Sensitivity of Consumption," Cahiers de recherche CREFE / CREFE Working Papers 3, CREFE, Université du Québec à Montréal.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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- Christopher D Carroll & Karen E Dynan & Spencer D Krane, 1999. "Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets," Economics Working Paper Archive 416, The Johns Hopkins University,Department of Economics.
- Marc-Andre Letendre & Gregor Smith, 2000.
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- Sule Alan, 2004. "Precautionary Wealth and Portfolio Allocation: Evidence from Canadian Microdata," Social and Economic Dimensions of an Aging Population Research Papers 117, McMaster University.
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