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Precautionary savings under liquidity constraints: evidence from Italy

  • M. Deidda


In this paper, I empirically investigate precautionary savings under liquidity constraints in Italy using household panel data. Following Jappelli and Pistaferri (2000) I analyze a 3- year (1989-1993) rotating panel of the Bank of Italy Survey of Household Income and Wealth (SHIW). I exploit a unique indicator of subjective variance of income growth, which allows to measure the strength of the precautionary motive for saving, and a variety of survey-based indicators of liquidity constraints. However, my analysis deviates from Jappelli and Pistaferri’s in three aspects. First of all, I attempt to differentiate between the standard precautionary motive for saving caused by uncertainty from the one due to liquidity constraints. I address this issue by using an endogenous switching regression approach, which allows me to cope with endogeneity issues associated with sample splitting techniques. Secondly, I try to capture changes in consumption behaviour of households who are not constrained at present , but expect binding constraints in the future. Finally,I cope with the downward bias in the estimation of the parameter associated to the subjective variance of income growth, using a direct measure of risk aversion. I eventually found the precautionary motive for savings to be stronger for those households who face binding constraints, or expect constraints to be binding in the future. Indeed, a complementarity relation exists between precautionary savings and liquidity constraints. Moreover, the introduction of a survey-based measure of risk aversion allows a better identification of the coefficient associated with the subjective measure of variance of income growth.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 200918.

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Date of creation: 2009
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Handle: RePEc:cns:cnscwp:200918
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  3. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
  4. Garcia, R. & Lusardi, A. & Ng, S., 1995. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Cahiers de recherche 9511, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2001. "The Empirical Importance of Precautionary Saving," CEPR Discussion Papers 2737, C.E.P.R. Discussion Papers.
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  12. Vassilis A. Hajivassiliou & Yannis M. Ioannides, 1995. "Unemployment and Liquidity Constraints," Cowles Foundation Discussion Papers 1090, Cowles Foundation for Research in Economics, Yale University.
  13. Jeong-Joon Lee & Yasuyuki Sawada, 2005. "Precautionary Saving under LiquidityConstraints: Evidence from Rural Pakistan," CIRJE F-Series CIRJE-F-377, CIRJE, Faculty of Economics, University of Tokyo.
  14. Fumio Hayashi, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1083-1113.
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  17. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc.
  18. Fumio Hayashi, 1985. "The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 183-206.
  19. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-53, July.
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  23. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
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