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Buffer-stock saving and households' response to income shocks

Author

Listed:
  • Giulio Fella

    (Queen Mary University of London)

  • Serafin Frache

    (Banco Central del Uruguay)

  • Winfried Koeniger

    (University of St.Gallen)

Abstract

We use the Italian Survey of Household Income and Wealth, a rather unique dataset with a long time dimension of panel information on consumption, income and wealth, to structurally estimate a buffer-stock saving model. We exploit the information contained in the joint dynamics of income, consumption and wealth to quantify the degree of insurance against income risk implied by the estimated model. We find that Italian households insure between 89 and 95 percent of a transitory and between 7 and 9 percent of a permanent income shock. Our estimates are in line with empirical estimates for the same dataset, that do not impose any model structure on the consumption process. This suggests that Italian households do not have access to significant insurance beyond that implied by self-insurance.

Suggested Citation

  • Giulio Fella & Serafin Frache & Winfried Koeniger, 2017. "Buffer-stock saving and households' response to income shocks," Working Papers 825, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:825
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2017/items/wp825.pdf
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    References listed on IDEAS

    as
    1. Carroll, Christopher D., 2009. "Precautionary saving and the marginal propensity to consume out of permanent income," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 780-790, September.
    2. Thomas Hintermaier & Winfried Koeniger, 2011. "On the Evolution of the US Consumer Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 317-338, April.
    3. Orazio P. Attanasio & Nicola Pavoni, 2011. "Risk Sharing in Private Information Models With Asset Accumulation: Explaining the Excess Smoothness of Consumption," Econometrica, Econometric Society, vol. 79(4), pages 1027-1068, July.
    4. Fatih Guvenen & Anthony A. Smith, 2014. "Inferring Labor Income Risk and Partial Insurance From Economic Choices," Econometrica, Econometric Society, vol. 82, pages 2085-2129, November.
    5. Joseph G. Altonji & Aloysius Siow, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 293-328.
    6. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244.
    7. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-976, October.
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    More about this item

    Keywords

    Consumption; Wealth; Incomplete markets; Insurance;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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