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The Nature of Precautionary Wealth

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  • Christopher D. Carroll
  • Andrew A. Samwick

Abstract

This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with greater income uncertainty. However, the apparent pattern of precautionary saving is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be less sensitive to uncertainty in permanent income than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the 'buffer-stock' models of saving described in Carroll (1992) or Deaton (1991), in which consumers hold wealth principally to insulate consumption against near term fluctuations in income.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5193.

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Date of creation: Jul 1995
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Publication status: published as Journal of Monetary Economics, Vol. 40, no. 1 (September 1997): 41-72.
Handle: RePEc:nbr:nberwo:5193

Note: AG EFG PE
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