Consumption Growth, Income Growth and Earings Uncertainty: Simple Cross-Country Evidence
The Consumption growth/income growth parallel found in the low frequency cross Country aggregate data has been interpreted as evidence against the certainty equivalence life-cycle/permanent income hypothesis. This paper analyzes existence of precautionary premia in consumption growth as a potential source of the parallel, and tests the hypothesis that countries with inherently larger earning uncertainty show systematically steeper consumption growth paths and higher saving rates. Empirical results indicate a potentially important role of precautionary saving motives in explaining the cross-country differentials in consumption growth and saving rate. However, the presence of precautionary premia is not enough to account for the high correlation between average consumption growth and average income growth across countries. I conclude that the consumption growth/income growth parallel remains as a robust long-run empirical relationship challenging the life-cycle/permanent income hypothesis.
Volume (Year): 13 (1999)
Issue (Month): 2 ()
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