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Risk pooling, precautionary saving and consumption growth

Author

Listed:
  • James Banks

    (Institute for Fiscal Studies and University of Manchester)

  • Richard Blundell

    (Institute for Fiscal Studies and University College London)

  • Agar Brugiavini

    (Institute for Fiscal Studies and Ca' Foscari University of Venice)

Abstract

In this paper we model the evolution ofincome risk and consumption growth.We decompose the time series innovation of the income process intoits common and cohort-specific components. From these we compute conditional variances which are used as separate risk terms in a consumptiongrowthequation. U singalongtimeseriesofB ritishhouseholddatawe ndstrongevidenceofprecautionarysaving. Specically, afterallowing fordemographicand labourmarketstatus, there is an independent role for income risk in explaining consumption growth. R atherthanthecomponentthatis commonacross cohorts, however, it is thecohort-specicelementthatis important in determining changes in consumption growth.This result points to a failure of between-cohort insurance mechanisms.

Suggested Citation

  • James Banks & Richard Blundell & Agar Brugiavini, 1999. "Risk pooling, precautionary saving and consumption growth," IFS Working Papers W99/19, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:99/19
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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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