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Keep calm and consume? Subjective uncertainty and precautionary savings

  • Barbara Broadway
  • John P. Haisken-DeNew
Article
  • 3 Downloads

Abstract

This paper estimates the effect of income uncertainty on assets held in accounts and cash, and finds substantial empirical evidence for precautionary savings. Using household-level panel data, it explicitly distinguishes between ‘real’ income uncertainty the household is actually exposed to, and ‘perceived’ income uncertainty. It finds that the latter substantially increases precautionary savings above and beyond the effect of ‘real’ income uncertainty. The effect of subjective economic uncertainty on behaviour has only begun to show up after the Great Recession. The economic crisis appears to have shifted households’ willingness to forgo current consumption for insurance pruposes. Our results imply that households save above their optimal level especially after and during a crisis, potentially exacerbating the economic downturn.

Keywords

Subjective uncertainty Precautionary savings HILDA CASiE 

JEL classification

D84 D14 

Notes

Acknowledgements

The research reported on in this paper is part of the Australian Research Council (ARC) funded Discovery Project `Subjective Expectations and Economic Behaviour’ (Grant DP130103755, awarded to John Haisken-DeNew). Access to the Consumer Attitudes, Sentiments & Expectations (CASiE) Survey was graciously provided by Guay Lim at the the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). The paper uses the general release file of the Household, Income and Labour Dynamics in Australia (HILDA) survey. The unit record data from the HILDA Survey can be obtained from the Australian Data Archive, which is hosted by The Australian National University (ANU). The HILDA survey was initiated and is funded by the Australian Government Department of Social Services (DSS) and managed by the Melbourne Institute. The findings and views reported in this paper are those of the authors alone and should not be attributed to the Australian Government, DSS, the Australian Data Archive, the ARC, ANU or the Melbourne Institute, and none of those entities bear any responsibility for the analysis or interpretation of the unit record data from the HILDA Survey provided by the authors. We thank Melisa Bubonya, Bob Gregory, Arvid Hoffman, Sonja Kassenboehmer, Viet Nguyen, Davud Rostam-Afschar as well as participants at the 2017 Conference of the European Economic Association in Lisboa, the 2016 European Society for Population Economics Conference in Berlin, the 2016 Hepburn Springs Workshop, and the Department of Economics Seminar Series at Deakin University for helpful comments and suggestions.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Melbourne Institute of Applied Economic and Social ResearchUniversity of MelbourneMelbourneAustralia

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