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Precautionary Saving: a review of the theory and the evidence

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  • Lugilde, Alba
  • Bande, Roberto
  • Riveiro, Dolores

Abstract

Standard macroeconomic models show that uncertainty plays a significant role in consumption and saving decisions under rather mild conditions, namely the convexity of the marginal utility of consumption. Increased uncertainty generates a positive extra saving, the so-called “precautionary saving”. Although this hypothesis has been tested by a large number of authors, both at macro and micro level, the empirical results are not conclusive, and the main conclusion than can be drawn is that there is neither consensus on the intensity of that motive for saving, nor on the most appropriate measure of uncertainty. This paper provides a comprehensive review of the literature (both theoretical and empirical) and discusses the main controversial issues and the different approaches followed by the studies addressing empirically the test of precautionary saving.

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  • Lugilde, Alba & Bande, Roberto & Riveiro, Dolores, 2017. "Precautionary Saving: a review of the theory and the evidence," MPRA Paper 77511, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:77511
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    Keywords

    precautionary saving; Euler equation; preferences types; empirical puzzles; uncertainty measures;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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