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A Direct Test of The Buffer-Stock Model of Saving

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Author Info
Tullio Jappelli
Mario Padula
Luigi Pistaferri

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Abstract

Recent models with liquidity constraints and impatience emphasize that consumers use savings to buffer income fluctuations. When wealth is below an optimal target, consumers try to increase their buffer stock of wealth by saving more. When it is above target, they increase consumption. This important implication of the buffer stock model of saving has not been subject to direct empirical testing. We derive from the model an appropriate theoretical restriction and test it using data on working-age individuals drawn from the 2002 and 2004 Italian Surveys of Household Income and Wealth. One of the most appealing features of the survey is that it has data on the amount of wealth held for precautionary purposes, which we interpret as target wealth in a buffer stock model. The test results do not support buffer stock behavior, even among population groups that are more likely, a priori, to display such behavior. The saving behavior of young households is instead consistent with models in which impatience, relative to prudence, is not as high as in buffer stock models. (JEL: D91) (c) 2008 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 6 (2008)
Issue (Month): 6 (December)
Pages: 1186-1210
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Handle: RePEc:tpr:jeurec:v:6:y:2008:i:6:p:1186-1210

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

References listed on IDEAS
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  1. João Ejarque & Søren Leth-Petersen, 2008. "Consumption and Savings of First Time House Owners: How Do They Deal with Adverse Income Shocks?," CAM Working Papers 2008-08, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
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