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Precautionary saving and changes in risk correlation

Author

Listed:
  • Marco Magnani

    () (Dipartimento di Economia, Università di Parma)

  • Mario Menegatti

    () (Dipartimento di Economia, Università di Parma)

Abstract

This note analyzes the effect of a change in the covariance between labor income risk and interest rate risk on the threshold level for prudence ensuring positive precautionary saving, recently derived by Baiardi, Magnani and Menegatti (2014). We show that this effect is different in different cases. An increase in the covariance between the two risks decreases (increases) the threshold level when the variance of labor income is smaller (larger) than the variance of the return on saving. An interpretation of these results in terms of elasticity of total variance with respect to saving is provided.

Suggested Citation

  • Marco Magnani & Mario Menegatti, 2015. "Precautionary saving and changes in risk correlation," Economics Bulletin, AccessEcon, vol. 35(1), pages 561-570.
  • Handle: RePEc:ebl:ecbull:eb-14-01050
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    File URL: http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I1-P60.pdf
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    References listed on IDEAS

    as
    1. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2014. "Precautionary saving under many risks," Journal of Economics, Springer, vol. 113(3), pages 211-228, November.
    2. Jingyuan Li, 2012. "Precautionary saving in the presence of labor income and interest rate risks," Journal of Economics, Springer, vol. 106(3), pages 251-266, July.
    3. Michel Denuit & Louis Eeckhoudt & Mario Menegatti, 2011. "Correlated risks, bivariate utility and optimal choices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(1), pages 39-54, January.
    4. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
    5. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
    6. M. Menegatti, 2007. "A new interpretation for the precautionary saving motive: a note," Journal of Economics, Springer, vol. 92(3), pages 275-280, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Marco Magnani, 2017. "A new interpretation of the condition for precautionary saving in the presence of an interest-rate risk," Journal of Economics, Springer, vol. 120(1), pages 79-87, January.

    More about this item

    Keywords

    Precautionary saving; labor income risk; interest rate risk; prudence; risk covariance;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D1 - Microeconomics - - Household Behavior

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