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Consumption and Precautionary Saving: An Empirical Analysis under Both Financial and Environmental Risks

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  • Donatella Baiardi

    (Department of Economics and Quantitative Methods, University of Pavia)

  • Matteo Manera

    (Department of Statistics, University of Milano-Bicocca, Italy and Fondazione Eni Enrico Mattei)

  • Mario Menegatti

    (Department of Economics, University of Parma)

Abstract

This paper studies the empirical relationship between consumption and saving under two different sources of uncertainty: financial risk and environmental risk. The analysis is carried out using time series data for six advanced economies in the period 1965-2007. The results support the theoretical conclusions that both financial risk alone and the interaction between financial and environmental risks affect consumption. Moreover, we suggest a solution to some shortcomings which concern the empirical analysis performed with one-argument utility functions. Finally, we provide new estimates of indexes of relative risk aversion and relative prudence, and relative preference of environmental quality.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.62.

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Date of creation: Aug 2011
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Handle: RePEc:fem:femwpa:2011.62

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Keywords: Consumption; Precautionary Saving; Financial Risk; Environmental Risk; Prudence; Relative Risk Aversion; Uncertainty;

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References

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  1. DENUIT, Michel M. & EECKHOUDT, Louis & MENEGATTI, Mario, . "Correlated risks, bivariate utility and optimal choices," CORE Discussion Papers RP -2272, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Mario Menegatti, 2010. "Uncertainty And Consumption: New Evidence In Oecd Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 62(3), pages 227-242, 07.
  3. M. Menegatti & D. Baiardi, 2010. "Pigouvian Tax, Abatement Policies and Uncertainty on the Environment," Economics Department Working Papers 2010-EP04, Department of Economics, Parma University (Italy).
  4. Smulders, Sjak & Gradus, Raymond, 1996. "Pollution abatement and long-term growth," European Journal of Political Economy, Elsevier, vol. 12(3), pages 505-532, November.
  5. Friedl, Birgit & Getzner, Michael, 2003. "Determinants of CO2 emissions in a small open economy," Ecological Economics, Elsevier, vol. 45(1), pages 133-148, April.
  6. repec:hal:cesptp:hal-00267891 is not listed on IDEAS
  7. EECKHOUDT, louis & REY, Béatrice & SCHLESINGER, Harris, . "A good sign for multivariate risk taking," CORE Discussion Papers RP -1900, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Marzio Galeotti & Matteo Manera & Alessandro Lanza, 2006. "On the Robustness of Robustness Checks of the Environmental Kuznets Curve," Working Papers 20060501, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica, revised May 2006.
  9. Dejuan, Joseph P & Seater, John J & Wirjanto, Tony S, 2004. "A Direct Test of the Permanent Income Hypothesis with an Application to the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1091-1103, December.
  10. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  11. Mario Menegatti, 2009. "Optimal saving in the presence of two risks," Journal of Economics, Springer, vol. 96(3), pages 277-288, April.
  12. Joon-Ho Hahm & Douglas G. Steigerwald, 1999. "Consumption Adjustment under Time-Varying Income Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 32-40, February.
  13. Mario Menegatti, 2007. "Consumption and uncertainty: a panel analysis in Italian Regions," Applied Economics Letters, Taylor & Francis Journals, vol. 14(1), pages 39-42.
  14. Alessandra Guariglia & Byung-Yeon Kim, 2003. "The Effects of Consumption Variability on Saving: Evidence from a Panel of Muscovite Households," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(3), pages 357-377, 07.
  15. Menegatti, Mario, 2001. "On the Conditions for Precautionary Saving," Journal of Economic Theory, Elsevier, vol. 98(1), pages 189-193, May.
  16. Ayong Le Kama, A. & Schubert, K., 1999. "Growth, Environment and Uncertain Future Preferences," Papiers d'Economie Mathématique et Applications 1999.52, Université Panthéon-Sorbonne (Paris 1).
  17. Joseph P. Dejuan & John J. Seater & Tony S. Wirjanto, 2010. "Testing the Stochastic Implications of the Permanent Income Hypothesis Using Canadian Provincial Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(1), pages 89-108, 02.
  18. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
  19. Mario Menegatti, 2009. "Precautionary saving in the presence of other risks: a comment," Economic Theory, Springer, vol. 39(3), pages 473-476, June.
  20. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
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Cited by:
  1. Donatella Baiardi & Matteo Manera & Mario Menegatti, 2014. "The Effects of Environmental Risk on Consumption: an Empirical Analysis on the Mediterranean Countries," Working Papers 271, University of Milano-Bicocca, Department of Economics, revised Apr 2014.
  2. Donatella Baiardi & Matteo Manera & Mario Menegatti, 2014. "The Effects of Environmental Risk on Consumption: an Empirical Analysis on the Mediterranean Countries," Working Papers 2014.43, Fondazione Eni Enrico Mattei.

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