Determinants of Precautionary Savings : Elasticity of Intertemporal Substitution vs. Risk Aversion
AbstractThe purpose of this paper is to understand the effects of the elasticity of intertemporal substitution (EIS) and risk aversion on savings separately and determine which coefficient is more important factor for precautionary savings. This is an important question since a significant fraction of the capital accumulation is due to precautionary savings according to literature. Thus, knowing the important determinant of precautionary savings will be helpful to understand the capital accumulation mechanism. This paper uses an Epstein-Zin utility function, which permits risk attitudes to be disentangled from the degree of intertemporal substitutability, in the model in order to study the effects of EIS and risk aversion separately. It is shown that saving increases as EIS increases. Similarly, saving increases as the coefficient of risk aversion increases. More importantly, it is observed that EIS is a more important factor for precautionary savings than risk aversion because saving is more responsive to changes in EIS than changes in risk aversion.
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Bibliographic InfoPaper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1227.
Date of creation: 2012
Date of revision:
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Precautionary Savings; Epstein-Zin Utility; Risk Aversion; Elasticity of Intertemporal Substitution;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-22 (All new papers)
- NEP-DGE-2012-09-22 (Dynamic General Equilibrium)
- NEP-UPT-2012-09-22 (Utility Models & Prospect Theory)
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