Risk pooling, precautionary saving and consumption growth
In this paper we model the evolution ofincome risk and consumption growth.We decompose the time series innovation of the income process intoits common and cohort-specific components. From these we compute conditional variances which are used as separate risk terms in a consumptiongrowthequation. U singalongtimeseriesofB ritishhouseholddatawe… ndstrongevidenceofprecautionarysaving. Speci…cally, afterallowing fordemographicand labourmarketstatus, there is an independent role for income risk in explaining consumption growth. R atherthanthecomponentthatis commonacross cohorts, however, it is thecohort-speci…celementthatis important in determining changes in consumption growth.This result points to a failure of between-cohort insurance mechanisms.
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