Are Korean Consumers Prudent? (in Korean)

Seewon Kim ()
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Seewon Kim: Chonnam National University

Economic Analysis (Quarterly), 2007, vol. 13, issue 3, 157-197

Abstract: Consumers are prudent in the sense that they accumulate precautionary savings against uncertainties in future income. Using data constructed from the Korean National Accounts and Korean Household Income and Expenditure Surveys, this study investigates the direct evidence that Korean consumers are prudent. A new macro time series model is derived from a cross-sectional aggregation of log-linearized Euler equations. One advantage of this new model is that it is possible to effectively overcome many econometric problems, such as measurement errors or consumer heterogeneity, occurring in most previous studies that rely on cross-sectional estimation. Little evidence supporting the theory of consumer prudence is found in an ARCH-M type model under the complete market assumption. On the other hand, some evidence that Korean consumers are prudent is found in the incomplete market model, in which the cross-sectional variance of consumption expenditures represents income uncertainty. After controlling for measurement errors, the test yields a precise estimate for a relative prudence coefficient which is consistent with the widely accepted beliefs about risk aversion. Although in some cases the theory is not supported, the test results are more consistent with the theory than the results of the previous direct tests.

Keywords: precautionary saving; relative prudence coefficient; ARCH-M model; currency crisis (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Date: 2007
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