Precautionary Saving: An Explanation for Excess Sensitivity of Consumption

Michel Normandin ()

Journal of Business & Economic Statistics, 1994, vol. 12, issue 2, 205-19

Abstract: The permanent income hypothesis under certainty equivalence yields a martingale consumption process. Empirically, this hypothesis is rejected because consumption is excessively sensitive to anticipated income. One approach to account for excess sensitivity is to relax certainty equivalence by using utility functions that induce precautionary saving. This article analyzes a hyperbolic absolute risk-aversion utility function. Empirically, some reasonable parameterizations of this specification allow one to match the excess sensitivity associated with the data. Also, these parameterizations permit one to account for the excess smoothness problem. However, excess sensitivity and excess smoothness do not reflect the same phenomenon.

Date: 1994
References: Add references at CitEc
Citations: View citations in EconPapers (8)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Precautionary Saving: An Explanation for Excess Sensitivity of Consumption (1992)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bes:jnlbes:v:12:y:1994:i:2:p:205-19

Ordering information: This journal article can be ordered from
http://www.amstat.org/publications/index.html

Access Statistics for this article

Journal of Business & Economic Statistics is currently edited by Jonathan H. Wright and Keisuke Hirano

More articles in Journal of Business & Economic Statistics from American Statistical Association
Bibliographic data for series maintained by Christopher F. Baum ().