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Open Economies Review

, Volume 26, Issue 5, pp 911–939 | Cite as

Precautionary Strategies and Household Saving

  • Joshua AizenmanEmail author
  • Eduardo Cavallo
  • Ilan Noy
Research Article

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 savings Macroeconomic risks Informality Family firms 

JEL Classification

E21 E26 

Notes

Acknowledgments

The authors wish to thank Matías Marzani and Mathieu Pedemonte for superb research assistance. All remaining errors are our responsibility.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.University of Southern CaliforniaLos AngelesUSA
  2. 2.Inter-American Development BankWashingtonUSA
  3. 3.Victoria University of WellingtonWellingtonNew Zealand

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