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Precautionary strategies and household savings

Joshua Aizenman (), Eduardo Cavallo () and Ilan Noy ()

No 4198, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

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.

Keywords: Precautionary savings; Macroeconomic risks; Informality; Family firms (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-iue and nep-mac
Date: 2015
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Journal Article: Precautionary Strategies and Household Saving (2015) Downloads
Working Paper: Precautionary Strategies and Household Saving (2015) Downloads
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