Working Paper: NBER ID: w2336
Authors: Jonathan Skinner
Abstract: This paper argues that precautionary savings against uncertain income comprise a large fraction of aggregate savings. A closed-form approximation for life cycle consumption subject to uncertain interest rates and earnings is derived by taking a second-order Taylor-Series approximation of the Euler equations. Using empirical measures of income uncertainty, I find that precautionary savings comprises up to 56 percent of aggregate life cycle savings. The derived expression for n-period optimal consumption is easily implemented for econometric estimation, and accords well with the exact numerical solution. Empirical comparisons of savings patterns among occupational groups using the Consumer Expenditure Survey contradict the predictions of the life cycle model. Riskier occupations, such as the self-employed and salespersons, save less than other occupations, although this finding may in part reflect unobservable differences in risk aversion among occupations.
Keywords: precautionary savings; life cycle consumption; income uncertainty
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 savings (D14) | aggregate life cycle savings (D15) |
| income uncertainty (D89) | savings behavior (D14) |
| riskier occupations (J28) | savings rates (D14) |
| savings behavior (D14) | consumption while young (D15) |
| income uncertainty (D89) | precautionary savings (D14) |
| self-selection (C52) | risk tolerance (G11) |