Working Paper: NBER ID: w21019
Authors: Joshua Aizenman; Eduardo Cavallo; Ilan Noy
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 saving; household saving; macroeconomic volatility; informal sector
JEL Codes: E21; E26; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic volatility (E32) | private saving rates (D14) |
| macroeconomic risk (variance of per capita real GDP growth) (F62) | private saving rates (D14) |
| real income per capita (E25) | private saving rates (D14) |
| banking sector concentration (G21) | private saving rates (D14) |
| institutional quality (L15) | private saving rates (D14) |
| informal firm investment decisions (D25) | household saving decisions (D14) |