The Precautionary Savings Motive and Household Savings
33 Pages Posted: 17 Apr 2012
Date Written: February 24, 2012
We quantified the relative importance of the precautionary motive in determining savings. Existing empirical evidence suggests that the impact of precautionary savings is small if one uses a subjective measure of uncertainty about next year income. However, other studies use an ‘objective’ method to proxy for income uncertainty by exploiting life-cycle income variation. These studies find a large impact of precautionary savings. These contradictory results may be either suggestive of methodological shortcomings or the result of institutional differences between countries. We refined the subjective method by taking into account the uncertainty as perceived by the second income earner. We then apply the ‘objective’ and ‘subjective’ method to the same dataset and obtain similar results: the subjective and objective methods suggest that precautionary savings account for approximately 30% of savings. Obtaining converging results does not necessarily determine the empirical relevance of precautionary savings if studies from different countries are compared.
Keywords: precautionary savings, income uncertainty
JEL Classification: D12, D91, E21
Suggested Citation: Suggested Citation