A Note on Precautionary Savings

Abstract:     
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, E21

working papers series