Precautionary Saving and Health Risk: Evidence from Italian Households Using a Time Series of Cross Sections
18 Pages Posted: 28 Nov 2005
Date Written: November 2005
In this paper we analyse the importance of precautionary saving in Italy. In contrast to previous studies, we focus on two contemporaneous sources of uncertainty, income and health expenditures, to explain the presence of precautionary saving. The major changes occurred in public health care policies from 1985 to 1996 have caused households to pay a larger share of their out-of-the-pocket medical expenditures. We therefore expect consumers to react to this uncertainty by generating precautionary saving. We test this prediction using an Euler equation augmented with the presence of the variance of income and health expenditure shocks. Our results show strong support for the precautionary saving hypothesis as a response to health uncertainty.
Keywords: Precautionary saving, Euler equation, Health risk, Italian
JEL Classification: D91, E21
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