The Empirical Importance of Precautionary Saving

19 Pages Posted: 13 Apr 2001

See all articles by Pierre-Olivier Gourinchas

Pierre-Olivier Gourinchas

University of California, Berkeley - Department of Economics; University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2001

Abstract

One of the basic motives for saving is the accumulation of wealth to insure future welfare. Both introspection and extant research on consumption insurance find that people face substantial risks that they do not fairly pool. In theory, the consumption and wealth accumulation of price-taking households in an economy with incomplete markets differs substantially from the behaviour of these same households in the equivalent economy with complete-markets. The question we address in this article is whether we find this difference to be large in practice. What is the empirical importance of precautionary saving?

We provide a simple decomposition that characterizes the importance of precautionary saving in the US economy. We use this decomposition as an organizing framework to present four main findings: (a) the concavity of the consumption policy rule, (b) the importance of precautionary saving for life-cycle saving and wealth accumulation, (c) the contribution of changes in risk to fluctuations in aggregate consumption and (d) the significant impact of incomplete markets on aggregate fluctuations in calibrated general equilibrium models.

We conclude with directions for future research.

Keywords: Consumption, fluctuations, incomplete markets, insurance, precautionary saving, saving, wealth accumulation

JEL Classification: D91, E21

Suggested Citation

Gourinchas, Pierre-Olivier and Parker, Jonathan A., The Empirical Importance of Precautionary Saving (March 2001). Available at SSRN: https://ssrn.com/abstract=266736

Pierre-Olivier Gourinchas (Contact Author)

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University of California, Berkeley - Economic Analysis & Policy Group ( email )

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United States

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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E62-416
Cambridge, MA
United States
617-253-7218 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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