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Precautionary Saving and Precautionary Wealth

Abstract

Precautionary saving measures the consequences of uncertainty for the rate of change (and therefore the level) of wealth. The qualitative aspects of precautionary saving theory are now well established: an increase in uncertainty will increase the level of saving, but will reduce the marginal propensity to save. Quantitatively, theory combined with empirical estimates of risk aversion suggests that precautionary saving and precautionary wealth should be quite large. More direct empirical evidence on precautionary saving suggests that precautionary effects on saving are substantial, but the magnitude of the effects is disputed, and the different estimates are not all expressed in comparable units.

Keywords

  • Calibration
  • Consumption function
  • Elasticity of intertemporal substitution
  • Euler equations
  • Impatience
  • Liquidity constraints
  • Perfect foresight
  • Precautionary saving
  • Precautionary savings
  • Precautionary wealth
  • Preferences
  • Risk aversion
  • Time consistency
  • Uncertainty

JEL Classifications

  • D4
  • D10

This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume

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  1. http://link.springer.com/referencework/10.1057/978-1-349-95121-5

    Christopher D. Carroll & Miles S. Kimball

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  1. Christopher D. Carroll
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  2. Miles S. Kimball
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    Carroll, C.D., Kimball, M.S. (2008). Precautionary Saving and Precautionary Wealth. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_2079-1

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    • DOI: https://doi.org/10.1057/978-1-349-95121-5_2079-1

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