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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
Date of revision:
Handle: RePEc:cns:cnscwp:200918
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  1. V A Hajivassiliou & Y Ioannides, 1995. "Unemployment and Liquidity Constraints," CEP Discussion Papers dp0243, Centre for Economic Performance, LSE.
  2. Garcia, Rene & Lusardi, Annamaria & Ng, Serena, 1997. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 154-76, May.
  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.
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  5. Luigi Guiso & Monica Paiella, 2008. "Risk Aversion, Wealth, and Background Risk," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1109-1150, December.
  6. 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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  9. Nocetti Diego & Smith William T, 2010. "Uncertainty, the Demand for Health Care, and Precautionary Saving," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, August.
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  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. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
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  16. Fumio Hayashi, 1984. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," NBER Working Papers 1305, National Bureau of Economic Research, Inc.
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  19. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May.
  20. Alessandra Guariglia, 2001. "Saving behaviour and earnings uncertainty: Evidence from the British Household Panel Survey," Journal of Population Economics, Springer, vol. 14(4), pages 619-634.
  21. Arthur Kennickell & Annamaria Lusardi, 2004. "Disentangling the Importance of the Precautionary Saving Mode," NBER Working Papers 10888, National Bureau of Economic Research, Inc.
  22. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
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  24. Fumio Hayashi, 1982. "The Effect of Liquidity Constraints on Consumption: Cross-Sectional Analysis," Discussion Papers 516, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  25. 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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