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The precaution of the rich and poor

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  • Scott Fulford

    (Boston College)

Abstract

Do households use savings to buffer against income fluctuations? Despite its common use to understand household savings decisions, the evidence for the buffer-stock model is surprisingly weak and inconsistent. This paper develops new testable implications based on a property of the model that the assets that households target for precautionary reasons should encapsulate all preferences and risks and the target should scale one for one with permanent income. I test these implications using the Survey of Consumer Finances in the United States. Those with incomes over $60,000 fit the model predictions very well, but below $60,000 households become increasingly precautionary. Income uncertainty is unrelated to the level of precaution. Moreover, households hold substantially weaker precautionary tendencies than standard models with yearly income shocks predict. Instead I propose and estimate a model of monthly disposable income shocks and a minimum subsistence level that can accommodate these findings.

Suggested Citation

  • Scott Fulford, 2012. "The precaution of the rich and poor," Boston College Working Papers in Economics 814, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:814
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    References listed on IDEAS

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    Cited by:

    1. Scott L. Fulford & Claire Greene & William Murdock, 2015. "U.S. consumer holdings and use of $1 Bills," Research Data Report 15-1, Federal Reserve Bank of Boston.
    2. Fulford, Scott L., 2015. "The surprisingly low importance of income uncertainty for precaution," European Economic Review, Elsevier, vol. 79(C), pages 151-171.
    3. Fulford, Scott L., 2015. "How important is variability in consumer credit limits?," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 42-63.

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    More about this item

    Keywords

    Buffer-stock model; Precaution; Household finance;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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