Working Paper: CEPR ID: DP2737
Authors: Pierre-Olivier Gourinchas; Jonathan Parker
Abstract: One of the basic motives for saving is the accumulation of wealth to insure future welfare. Both introspection and extant research on consumption insurance find that people face substantial risks that they do not fairly pool. In theory, the consumption and wealth accumulation of price-taking households in an economy with incomplete markets differs substantially from the behaviour of these same households in the equivalent economy with complete-markets. The question we address in this article is whether we find this difference to be large in practice. What is the empirical importance of precautionary saving?We provide a simple decomposition that characterizes the importance of precautionary saving in the US economy. We use this decomposition as an organizing framework to present four main findings:(a) the concavity of the consumption policy rule,(b) the importance of precautionary saving for life-cycle saving and wealth accumulation,(c) the contribution of changes in risk to fluctuations in aggregate consumption and(d) the significant impact of incomplete markets on aggregate fluctuations incalibrated general equilibrium models.We conclude with directions for future research.
Keywords: consumption; fluctuations; incomplete markets; insurance; precautionary saving; saving; wealth accumulation
JEL Codes: D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| precautionary saving (D14) | marginal propensity to consume out of liquid wealth (E21) |
| precautionary saving (D14) | life cycle saving (D15) |
| precautionary saving (D14) | wealth accumulation (E21) |
| precautionary saving (D14) | growth rate of consumption (E20) |
| changes in risk (D81) | fluctuations in aggregate consumption (E20) |
| precautionary saving (D14) | aggregate economic dynamics (E10) |