Emergency Fund Levels: Is Household Behavior Rational?
FINANCIAL COUNSELING AND PLANNING, 1997
10 Pages Posted: 8 Sep 1997 Last revised: 7 Mar 2019
Date Written: 1 1, 1997
Empirical studies have found that most households do not have recommended levels of emergency funds. A three-period model of optimal consumption is presented. The theoretical model suggests that many consumers without recommended levels of liquid assets may be acting rationally. The model is tested empirically with the 1983-1986 panels of the Surveys of Consumer Finances. Empirical findings support the model in that households who could have expected to have decreases in future real income were significantly more likely to hold adequate emergency fund reserves than those who could have expected to have no decline in real income.
JEL Classification: D91, E21
Suggested Citation: Suggested Citation