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Precautionary Saving under Liquidity Constraints: Evidence from Rural Pakistan (Published in "Journal of Development Economics". )

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  • Jeong-Joon Lee

    (Department of Economics, Towson University)

  • Yasuyuki Sawada

    (Faculty of Economics, University of Tokyo)

Abstract

This paper investigates precautionary saving under liquidity constraints in Pakistan using household panel data. In particular, while we estimates Kimball's (1990) prudence parameter, we deviate from Dynan's (1993) framework by explicitly considering liquidity constraints, as in Zeldes (1989). By doing so,we attempt to diffeerentiate the standard precautionary saving caused by uncertainty from the oneduetoliquidity constraints. Furthermore, endogenous liquidity constraints are considered toresolveis-sues of selection biases. In this study, we document substantial evidence of the presence of precautionary saving in Pakistan. More specifically, the estimated prudence is significantly higher for liquidity-constrainedhouse-holds as compared with unconstrained ones. The results support the emerging view that facilitating saving may often be more important than finding better ways of lending to the poor.

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Bibliographic Info

Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-051.

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Length: 31 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:cfi:fseres:cf051

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  1. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
  2. Morduch, J., 1995. "Income Smoothing and Consumption Smoothing," Papers 512, Harvard - Institute for International Development.
  3. Pender, John L., 1996. "Discount rates and credit markets: Theory and evidence from rural india," Journal of Development Economics, Elsevier, vol. 50(2), pages 257-296, August.
  4. Garcia, R. & Lusardi, A. & Ng, S., 1995. "Excess Sensitivity and Asymmetries in Consumption: an Empirical Investigation," Cahiers de recherche 9511, Universite de Montreal, Departement de sciences economiques.
  5. Timothy Besley, 1995. "Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 115-127, Summer.
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  7. Anjini Kochar, 1999. "Smoothing Consumption by Smoothing Income: Hours-of-Work Responses to Idiosyncratic Agricultural Shocks in Rural India," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 50-61, February.
  8. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
  9. Philip Merrigan & Michel Normandin, 1994. "Precautionary Saving Motives: An Assessment from U.K. Time Series of Cross-Sections," Cahiers de recherche CREFE / CREFE Working Papers 29, CREFE, Université du Québec à Montréal.
  10. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December.
  11. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
  12. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
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  19. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 495-526, July.
  20. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May.
  21. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," American Economic Review, American Economic Association, vol. 91(2), pages 406-412, May.
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  24. Alderman, Harold, 1996. "Saving and economic shocks in rural Pakistan," Journal of Development Economics, Elsevier, vol. 51(2), pages 343-365, December.
  25. Fafchamps, Marcel & Udry, Christopher & Czukas, Katherine, 1998. "Drought and saving in West Africa: are livestock a buffer stock?," Journal of Development Economics, Elsevier, vol. 55(2), pages 273-305, April.
  26. Chen Yuyu & Zhou Li-An, 2003. "How Prudent are Community Representative Consumers?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-20, March.
  27. Alderman, Harold & Garcia, Marito, 1993. "Poverty, household food security, and nutrition in rural Pakistan:," Research reports 96, International Food Policy Research Institute (IFPRI).
  28. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
  29. Xu, Xiaonian, 1995. "Precautionary Savings under Liquidity Constraints: A Decomposition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 675-90, August.
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