Precautionary Strategies and Household Saving

Joshua Aizenman, Eduardo Cavallo and Ilan Noy

No 21019, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E21 E26 F36 (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-iue and nep-mac
Note: IFM
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Citations: View citations in EconPapers (9)

Published as Joshua Aizenman & Eduardo Cavallo & Ilan Noy, 2015. "Precautionary Strategies and Household Saving," Open Economies Review, Springer, vol. 26(5), pages 911-939, November.

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Journal Article: Precautionary Strategies and Household Saving (2015)
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