Income Uncertainty and Precautionary Saving: Evidence from Household Rotating Panel Data

The aim of this paper is to analyse precautionary saving associated with income risk over the last two decades in Spain; some empirical evidence seems to point to the extension of temporary job contracts in those years as an important source of uncertainty for Spanish households. I use a rotating panel, the Spanish family expenditure survey, to model income dynamics and consumption growth. Following Banks, Blundell and Brugiavini (1999), I consider three components in the innovation to household income: idiosyncratic, (year-of-birth) cohort-specific and aggregate. I compute the conditional variance of these shocks, so as to include them as income risk terms in a consumption growth equation. I show how the rotating nature of my data (as compared to the repeated cross-sections available to Banks, Blundell and Brugiavini) can be exploited to identify the idiosyncratic component. The results provide evidence on the importance of precautionary motive for saving in response to income risk. Moreover, I find the cohort-specific (rather than aggregate) risk effect to be significant; this fact implies a failure of between-cohort insurance mechanisms.