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The Empirical Importance of Precautionary Saving

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  • Pierre-Olivier Gourinchas
  • Jonathan A. Parker

Abstract

One of the basic motives for saving is the accumulation of wealth to insure future welfare. Both introspection and extant research on consumption insurance find that people face substantial risks that they do not fairly pool. In theory, the consumption and wealth accumulation of price-taking households in an economy with incomplete markets differs substantially from the behavior of these same households in the equivalent economy with complete-markets. The question we address in this article is whether we find this difference to be large in practice. What is the empirical importance of precautionary saving? We provide a simple decomposition that characterizes the importance of precautionary saving in the U.S. economy. We use this decomposition as an organizing framework to present four main findings: (a) the concavity of the consumption policy rule, (b) the importance of precautionary saving for life-cycle saving and wealth accumulation, (c) the contribution of changes in risk to fluctuations in aggregate consumption and (d) the significant impact of incomplete markets on aggregate fluctuations in calibrated general equilibrium models. We conclude with directions for future research.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8107.

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Date of creation: Feb 2001
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:8107

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  1. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1996. "Asset pricing with idiosyncratic risk and overlapping generations," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 405, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 1999.
  2. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  3. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  4. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  5. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(2), pages 219-40, April.
  6. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 867-896, October.
  7. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics, EconWPA 9503003, EconWPA.
  8. Pierre-Olivier Gourinchas, 2000. "Precautionary Savings, LifeCycle and Macroeconomics," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0793, Econometric Society.
  9. Jonathan A. Parker & Bruce Preston, 2005. "Precautionary Saving and Consumption Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 95(4), pages 1119-1143, September.
  10. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 20-86, Wharton School Rodney L. White Center for Financial Research.
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