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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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    File URL: http://fmwww.bc.edu/EC-P/wp814.pdf
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    References listed on IDEAS

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    1. Michael Lokshin, 2006. "Difference-based semiparametric estimation of partial linear regression models," Stata Journal, StataCorp LP, vol. 6(3), pages 377-383, September.
    2. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
    3. Mark Huggett, 2004. "Precautionary Wealth Accumulation," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 769-781.
    4. Christopher D. Carroll & Karen E. Dynan & Spencer D. Krane, 2003. "Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 586-604, August.
    5. Christopher D. Carroll, 2004. "Theoretical Foundations of Buffer Stock Saving," Economics Working Paper Archive 517, The Johns Hopkins University,Department of Economics.
    6. repec:mpr:mprres:6497 is not listed on IDEAS
    7. Mark Kazarosian, 1997. "Precautionary Savings-A Panel Study," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 241-247, May.
    8. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    9. Fatih Guvenen, 2004. "Learning your Earning: Are Labor Income Shocks Really That Persistent?," 2004 Meeting Papers 177, Society for Economic Dynamics.
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    Cited by:

    1. Fulford, Scott L., 2015. "How important is variability in consumer credit limits?," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 42-63.
    2. Fulford, Scott L. & Greene, Claire & Murdock, William, 2015. "U.S. consumer holdings and use of $1 Bills," Research Data Report 15-1, Federal Reserve Bank of Boston.

    More about this item

    Keywords

    Buffer-stock model; Precaution; Household finance;

    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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