Precautionary Saving and Consumption Fluctuations

53 Pages Posted: 14 Sep 2002 Last revised: 29 Oct 2010

See all articles by Jonathan A. Parker

Jonathan A. Parker

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

Bruce J. Preston

Columbia University - Graduate School of Arts and Sciences - Department of Economics

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Date Written: September 2002

Abstract

This paper uses data on the expenditures of households to explain movements in the average growth rate of consumption in the U.S. from the beginning of 1982 to the end of 1997. We propose and implement a decomposition of consumption growth into series representing four proximate causes. These are new information, and three causes of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Incomplete markets for trading consumption in future states leads to statistically significant and countercyclical movements in expected consumption growth. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured.

Suggested Citation

Parker, Jonathan A. and Preston, Bruce J., Precautionary Saving and Consumption Fluctuations (September 2002). NBER Working Paper No. w9196, Available at SSRN: https://ssrn.com/abstract=330335

Jonathan A. Parker (Contact Author)

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

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Bruce J. Preston

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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