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The precaution of the rich and poor

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  • Scott Fulford

    (Boston College)

Abstract

Do households use savings to buffer against income fluctuations? Despite its common use to understand household savings decisions, the evidence for the buffer-stock model is surprisingly weak and inconsistent. This paper develops new testable implications based on a property of the model that the assets that households target for precautionary reasons should encapsulate all preferences and risks and the target should scale one for one with permanent income. I test these implications using the Survey of Consumer Finances in the United States. Those with incomes over $60,000 fit the model predictions very well, but below $60,000 households become increasingly precautionary. Income uncertainty is unrelated to the level of precaution. Moreover, households hold substantially weaker precautionary tendencies than standard models with yearly income shocks predict. Instead I propose and estimate a model of monthly disposable income shocks and a minimum subsistence level that can accommodate these findings.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 814.

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Date of creation: 15 Sep 2012
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Handle: RePEc:boc:bocoec:814

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Keywords: Buffer-stock model; Precaution; Household finance;

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  1. Mark Kazarosian, 1993. "Precautionary Savings- A Panel Study," Boston College Working Papers in Economics 247, Boston College Department of Economics.
  2. Mark Huggett, 2004. "Precautionary Wealth Accumulation," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 769-781, 07.
  3. Fatih Guvenen, 2004. "Learning your Earning: Are Labor Income Shocks Really That Persistent?," 2004 Meeting Papers 177, Society for Economic Dynamics.
  4. Carroll, Christopher D., 2011. "Theoretical foundations of buffer stock saving," CFS Working Paper Series 2011/15, Center for Financial Studies (CFS).
  5. James Mabli & Rhoda Cohen & Frank Potter & Zhanyun Zhao, 2010. "Hunger in America 2010 National Report Prepared for Feeding America," Mathematica Policy Research Reports 6497, Mathematica Policy Research.
  6. Christopher D. Carroll & Karen E. Dynan & Spencer D. Krane, 2003. "Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 586-604, August.
  7. Robert M. Townsend & Joseph P. Kaboski, 2009. "A Structural Evaluation of a Large-Scale Quasi-Experimental Microfinance Initiative," 2009 Meeting Papers 717, Society for Economic Dynamics.
  8. Michael Lokshin, 2006. "Difference-based semiparametric estimation of partial linear regression models," Stata Journal, StataCorp LP, vol. 6(3), pages 377-383, September.
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