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Precautionary Saving under LiquidityConstraints: Evidence from Rural Pakistan

  • Jeong-Joon Lee

    (Department of Economics, Towson University)

  • Yasuyuki Sawada

    (Faculty of Economics, University of Tokyo)

This paper investigates precautionary saving under liquidity constraints in Pakistan using household panel data. In particular, while we estimates Kimball's (1990) prudence parameter, we deviate from Dynan's (1993) framework by explicitly considering liquidity constraints, as in Zeldes (1989). By doing so,we attempt to diffeerentiate the standard precautionary saving caused by uncertainty from the oneduetoliquidity constraints. Furthermore, endogenous liquidity constraints are considered to resolve issues of selection biases. In this study, we document substantial evidence of the presence of precautionary saving in Pakistan. More specifically, the estimated prudence is significantly higher for liquidity-constrainedhouse-holds as compared with unconstrained ones. The results support the emerging view that facilitating saving may often be more important than finding better ways of lending to the poor.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-377.

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Length: 31 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:tky:fseres:2005cf377
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