Consumption Uncertainty and Precautionary Saving
69 Pages Posted: 3 Dec 2015 Last revised: 21 Dec 2018
Date Written: December 1, 2018
Using survey data from a representative sample of Dutch households, we estimate the strength of the precautionary saving motive by eliciting subjective expectations on future consumption. We find that expected consumption risk is higher for the young and the self-employed, and is correlated positively with income risk. We insert these subjective expectations (rather than consumption realizations, as in the existing literature) in a Euler equation for consumption, and estimate the degree of prudence by associating expected consumption risk with expected consumption growth. Robust OLS and IV estimates both indicate a coefficient of relative prudence of around 2.
Keywords: Consumption Risk, Euler Equation, Prudence, Precautionary Saving, Subjective Expectations
JEL Classification: D12, D14, D81, E03, E21, C14
Suggested Citation: Suggested Citation