Consumption Uncertainty and Precautionary Saving

Abstract

Using survey data from a representative sample of Dutch households, we estimate the strength of the precautionary saving motive by eliciting subjective expectations on future consumption. We find that expected consumption risk is higher for the young and the self-employed, and is correlated positively with income risk. We insert these subjective expectations (rather than consumption realizations, as in the existing literature) in an Euler equation for consumption, and estimate the degree of prudence by associating expected consumption risk with expected consumption growth. Robust OLS and IV estimates both indicate a coefficient of relative prudence of around 2.

Keywords: Consumption Risk, Euler Equation, Prudence, Precautionary Saving, Subjective Expectations

JEL Classification: D12, D14, D81, E03, E21, C14