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An Exact Analysis of Precautionary Consumption Growth

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  • Jeanne Commault

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using surveys about the distribution of future consumption growth, I find that on average 8% of expected consumption growth from a year to the next is explained by precautionary behavior. This precautionary component is sensitive to employment shocks, while the non-precautionary component of consumption growth is not. This is consistent with precautionary behavior playing an important role in business cycles. Standard approximated expressions of consumption growth do not capture this large contribution, mostly because they are based on the approximations of mathematical identities—a relation of the form x = f −1 (f(x)). Empirically, using such an approximation underestimates precautionary growth by more than half.

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  • Jeanne Commault, 2025. "An Exact Analysis of Precautionary Consumption Growth," Working Papers halshs-03591010, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03591010
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03591010v2
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    Cited by:

    1. Jordan Roulleau-Pasdeloup, 2025. "Explicit Consumption Functions with Borrowing Constraints: a Continuous Time Approach," Papers 2511.03452, arXiv.org.

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