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Information shocks and precautionary saving

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  • Feigenbaum, James

Abstract

Skinner's [1988. Risky income, life cycle consumption, and precautionary savings. Journal of Monetary Economics 22, 237-255] second-order approximation to the consumption function under CRRA utility is generalized to accommodate any structure of uninsurable income risk. To second order, a future income shock will induce precautionary saving in the present that depends on the variance of the expectation of the income shock at each intervening period. However, the expected rate of consumption growth depends only on the currently perceived variance of the expected present value of future income. In a finite-horizon model, precautionary saving produces a hump-shaped lifecycle profile of mean consumption primarily because the variance of future income decreases with age, but the lifecycle dynamics of total wealth also affect the shape of the profile. For a Markov income process with autocorrelations on the order of 0.9 or less, the second-order approximation performs surprisingly well for common parameter choices from the literature, but it does poorly as the autocorrelation approaches 1.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 12 (December)
Pages: 3917-3938

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:12:p:3917-3938

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Precautionary saving Timing of revelation of information Euler equation Consumption growth Consumption hump Lifecycle model;

References

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  13. Blundell, Richard & M. Stoker, Thomas, 1999. "Consumption and the timing of income risk," European Economic Review, Elsevier, vol. 43(3), pages 475-507, March.
  14. James Feigenbaum, 2006. "Precautionary Saving Unfettered," Computing in Economics and Finance 2006 29, Society for Computational Economics.
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  17. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 03-95, Wharton School Rodney L. White Center for Financial Research.
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Citations

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Cited by:
  1. Justin van de Ven & Paolo Lucchino, 2013. "Empirical Analysis of Household Savings Decisions in Context of Uncertainty: A Cross-Sectional Approach," Melbourne Institute Working Paper Series wp2013n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. repec:nsr:niesrd:407 is not listed on IDEAS
  3. James A. Feigenbaum & Geng Li, 2010. "A semiparametric characterization of income uncertainty over the life cycle," Finance and Economics Discussion Series 2010-42, Board of Governors of the Federal Reserve System (U.S.).
  4. Feigenbaum, James, 2011. "Precautionary saving or denied dissaving," Economic Modelling, Elsevier, vol. 28(4), pages 1559-1572, July.
  5. Mario Padula, 2008. "An approximate consumption function," Working Papers 2008_24, Department of Economics, University of Venice "Ca' Foscari".
  6. James Feigenbaum & Geng Li, 2008. "Lifecycle Dynamics of Income Uncertainty and Consumption," Working Papers 360, University of Pittsburgh, Department of Economics, revised Jul 2008.
  7. repec:nsr:niesrd:406 is not listed on IDEAS
  8. James Feigenbaum & Frank N. Caliendo & Emin Gahramanov, 2009. "Optimal Irrational Behavior," Working Papers 200901, Utah State University, Department of Economics and Finance.
  9. James Feigenbaum, 2008. "A Nonparametric Characterization of Income Uncertainty over the Lifecycle," Working Papers 359, University of Pittsburgh, Department of Economics, revised Jul 2008.

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