A Note on Precautionary Savings
Ahmed Mohamed Rostom
George Washington University - Economics Department; The World Bank
January 30, 2011
Precautionary savings occurs in response to uncertainty regarding future income. The precautionary motive to delay consumption and save in the current period rises due to the lack of completeness of insurance markets. Accordingly, individuals will not be able to insure against some bad state of the economy in the future. They anticipate that if this bad state is realized, they will earn lower income. To avoid future income fluctuations and smooth consumption, they set aside a precautionary reserve, by consuming less in the current period, and resort to it in case the bad state is realized in the future.
Number of Pages in PDF File: 6
Keywords: Precautionary Savings, Uncertainty, Life cycle model, Permanent Income Hypothesis
JEL Classification: D91, D81, E21working papers series
Date posted: December 25, 2011
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