The Nature of Precautionary Wealth

59 Pages Posted: 13 Jun 2000 Last revised: 22 Sep 2010

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1995

Abstract

This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with greater income uncertainty. However, the apparent pattern of precautionary saving is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be less sensitive to uncertainty in permanent income than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the 'buffer-stock' models of saving described in Carroll (1992) or Deaton (1991), in which consumers hold wealth principally to insulate consumption against near term fluctuations in income.

Suggested Citation

Carroll, Christopher D. and Samwick, Andrew A., The Nature of Precautionary Wealth (July 1995). NBER Working Paper No. w5193, Available at SSRN: https://ssrn.com/abstract=225256

Christopher D. Carroll (Contact Author)

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Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

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