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Precautionary strategies and household savings

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  • Aizenman, Joshua
  • Cavallo, Eduardo
  • Noy, Ilan
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.

Suggested Citation

  • Aizenman, Joshua & Cavallo, Eduardo & Noy, Ilan, 2015. "Precautionary strategies and household savings," Working Paper Series 19265, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:19265
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/19265
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    References listed on IDEAS

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    Cited by:

    1. Elena Ellmeier & Melanie Koch & Thomas Scheiber, 2023. "Saving behavior along the income distribution during the COVID-19 pandemic," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1/23, pages 7-21.
    2. Flavia Corneli, 2017. "Medium and long term implications of financial integration without financial development," Temi di discussione (Economic working papers) 1120, Bank of Italy, Economic Research and International Relations Area.
    3. Corneille, O. & D’Hondt, C. & De Winne, R. & Efendic, E. & Todorovic, A., 2021. "What leads people to tolerate negative interest rates on their savings?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 93(C).
    4. Cengiz Tunc & Abdullah Yavas, 2017. "Collateral Damage: The Impact of Mortgage Debt on U.S. Savings," Housing Policy Debate, Taylor & Francis Journals, vol. 27(5), pages 712-733, September.
    5. Aneta M. Klopocka & Rumiana Gorska, 2021. "Forecasting Household Saving Rate with Consumer Confidence Indicator and its Components: Panel Data Analysis of 14 European Countries," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 874-898.
    6. Flavia Corneli, 2021. "Financial Integration Without Financial Development," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 49(2), pages 201-220, June.
    7. Aneta Maria Kłopocka & Ryszard Wilczyński, 2021. "Do Credit Supply and Unemployment Risk Matter for Household Saving? Evidence from Poland," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 15(4), December.

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    More about this item

    Keywords

    Precautionary savings; Macroeconomic risks; Informality; Family firms;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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