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A Direct Test of the Buffer-Stock Model of Saving

Recent models with liquidity constraints and impatience emphasize that consumers use savings to buffer income fluctuations. When wealth is below an optimal target, consumers try to increase their buffer stock of wealth by saving more, while, if wealth is above target, they increase consumption. This important implication of the buffer stock model of saving has not been subject to direct empirical testing. We derive from the model an appropriate theoretical restriction and test it using data on working-age individuals drawn from the 2002 Italian Survey of Household Income and Wealth. One of the most appealing features of the survey is that respondents report the amount of wealth held for precautionary purposes, which we interpret as target wealth in a buffer stock model. The test results do not support buffer stock behavior, even among population groups that are more likely, a priori, to display such behavior. The saving behavior of young households is instead consistent with models in which impatience, relative to prudence, is not as high as in buffer stock models.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 150.

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Date of creation: 01 Dec 2005
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Publication status: published in the Journal of the European Economic Association, March 2006, vol. 4, n. 1, 75-115
Handle: RePEc:sef:csefwp:150
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