IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Income uncertainty and consumption growth in the UK

Listed author(s):
  • James Banks


    (Institute for Fiscal Studies and University of Manchester)

  • Richard Blundell


    (Institute for Fiscal Studies and IFS and UCL)

  • Agar Brugiavini


    (Institute for Fiscal Studies and University of Venice)

There is much interest in the importance of 'precautionary saving' - the degree to which uncertainty affects household consumption behaviour. In this paper we use household level data on income and expenditure to analyse the importance of precautionary saving in the UK. Using the repeated cross-sections of the Family Expenditure Survey from 1968 to 1992 we decompose the shocks to a dynamic income process into common and individual-specific components. From these we compute conditional variances of the innovations which are used as risk terms in a consumption growth equation. It is not the variance of income but the conditional variance of innovations in the income process that determine the degree of precautionary saving. We estimate this process at both the micro and macro level and construct the variances of the innovations explicitly. In the absence of panel data on individual households we develop a grouping estimator that allows us to estimate this income process with conditional heteroskedasticity from repeated cross-section data. Construction of the relevent conditional variances and substitution into a consumption growth equation yields the expected positive effects - precautionary saving increases consumption growth by depressing consumption - consumers delay spending in the face of uncertainty as the life-cycle model predicts.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W95/13.

in new window

Date of creation: 01 Jan 1995
Handle: RePEc:ifs:ifsewp:95/13
Contact details of provider: Postal:
The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

Phone: (+44) 020 7291 4800
Fax: (+44) 020 7323 4780
Web page:

More information through EDIRC

Order Information: Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ifs:ifsewp:95/13. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Emma Hyman)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.