Precautionary Strategies and Household Saving

Joshua Aizenman, Eduardo Cavallo, Ilan Noy

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

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.

Original languageEnglish
Pages (from-to)911-939
Number of pages29
JournalOpen Economies Review
Volume26
Issue number5
DOIs
StatePublished - 30 Nov 2015
Externally publishedYes

Keywords

  • Family firms
  • Informality
  • Macroeconomic risks
  • Precautionary savings

ASJC Scopus subject areas

  • Economics and Econometrics

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