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The Time-Varying Volatility of Earnings and Aggregate Precautionary Savings

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  • Lorenzo Pozzi

    (Erasmus University Rotterdam)

Abstract

Micro data are used for the US over the period 1968 - 1992 to estimate time-varying specifications for the conditional variance of earnings of individual households. Specifications estimated are standard and quadratic ARCH and GARCH processes. The cross-sectional mean of the estimated time-varying uncertainty of individual households is found to have a significant impact on aggregate consumption growth implying that earnings uncertainty and precautionary saving motives matter for the aggregate economy. The estimation of a buffer stock model of consumption with time-varying earnings uncertainty provides an estimated precautionary component in aggregate consumption growth. The importance of this component is found to decrease over the sample period, a result which is in line with the existing literature.

Suggested Citation

  • Lorenzo Pozzi, 2011. "The Time-Varying Volatility of Earnings and Aggregate Precautionary Savings," Tinbergen Institute Discussion Papers 11-144/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20110144
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    References listed on IDEAS

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    More about this item

    Keywords

    aggregate consumption; earnings; precaution; ARCH errors;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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