Precautionary Strategies and Household Saving

Joshua Aizenman, Eduardo Cavallo and Ilan Noy

Open Economies Review, 2015, vol. 26, issue 5, 939 pages

Abstract: Why do people save? A strand of the literature has emphasized the role of ‘precautionary’ motives; i.e., private agents save in order to mitigate unexpected future income shocks. An implication is that in countries faced with more macroeconomic volatility and risk, private saving should be higher. From the observable data, however, we find a negative correlation between risk and private saving in cross-country comparisons, particularly in developing countries. We provide a plausible explanation for the disconnect between precautionary-saving theory and the empirical evidence that is based on a model with a richer account for the various modes of ‘precautionary’ behavior by private agents, in cases where institutions are weaker and labor informality is prevalent. In such environments, household saving decisions are intertwined with firms’ investment decisions. As a result, the interaction between saving behavior, broadly construed, and aggregate risk and uncertainty, may be more complex than is frequently assumed. Copyright Springer Science+Business Media New York 2015

Keywords: Precautionary savings; Macroeconomic risks; Informality; Family firms; E21; E26 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s11079-015-9351-2

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