Does Uncertainty Affect Saving Decisions of Colombian Households? Evidence on Precautionary Saving

The aim of the paper is to test the effect of uncertainty on the consumption/saving decisions of the Colombian households searching for evidence of a precautionary motive for saving. We use two standard objective measures of income uncertainty, the income variability and the unemployment rate, and data taken from the National Budget and Expenditure Survey and the Large Integrated Household Survey. Results show evidence of a precautionary motive for saving when uncertainty is proxied by the unemployment rate. However, when measured through income variability uncertainty surprinsingly impacts positively on consumption. We explore whether this result may conceal a composition effect on our sample, given large differences on saving and non saving households. Thus, we estimate our model separately for both groups and find that, while for savers there is an important precautionary motive for saving independently of the uncertainty measure chosen, there is no evidence of any effect of uncertainty on non-savers consumption decisions. These results are robust to several segmentations of the sample by gender, age group or labour status. The paper contributes to the empirical literature on precautionary saving by providing evidence for a developing country for which, to date, there have been no studies on the effects of uncertainty on savings.