The surprisingly low importance of income uncertainty for precaution

Scott Fulford

No 862, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: While it is common to use income uncertainty to explain household saving decisions, there is much disagreement about the importance of precautionary saving. This paper suggests that income uncertainty is not an important motive for saving, although households do have other precautionary reasons to save. Using a question from the Survey of Consumer Finances that asks how much households want for precautionary purposes, this paper shows that expressed household preferences, and liquid savings, are much lower than predicted by standard modeling assumptions. Households rarely list unemployment as a reason to save. Perceived income uncertainty does not affect liquid savings or precautionary preferences. Neither does being in an occupation with higher income volatility. Instead, households seem very concerned with expenditure shocks.

Keywords: Income uncertainty; precaution; buffer-stock model; household saving; consumption (search for similar items in EconPapers)
JEL-codes: D14 D91 E21 (search for similar items in EconPapers)
Date: 2014-08-01
New Economics Papers: this item is included in nep-mac
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Journal Article: The surprisingly low importance of income uncertainty for precaution (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:862

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