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Precautionary Saving for Consecutive Income Risk

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  • Ben Etheridge

    (University of Essex)

Abstract

We examine whether households combine (or `complement') precautionary saving for near-term risks with saving for long-term risks. In a realistic life-cycle model, we find this complementarity effect accounts for 8-16% of precautionary savings. Almost all this effect is driven by permanent shocks. We then obtain analytical results from a 3-period model. We find permanent shocks induce complementarity for a general class of preferences, including those with constant relative risk aversion (CRRA). However, for most preferences in this class, the interaction of transitory shocks amplifies the precautionary motive. We interpret these results in terms of the structure of risks and the pattern of prudence over the wealth spectrum.

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  • Ben Etheridge, 2015. "Precautionary Saving for Consecutive Income Risk," 2015 Meeting Papers 1202, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1202
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    References listed on IDEAS

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    Cited by:

    1. Lugilde, Alba & Bande, Roberto & Riveiro, Dolores, 2017. "Precautionary Saving: a review of the theory and the evidence," MPRA Paper 77511, University Library of Munich, Germany.

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