Type
Article
Title
Precautionary Saving and Consumption Smoothing across Time and Possibilities
In
Journal of Money, Credit and Banking
Author(s)
KIMBALL Miles - Survery Research Center (SRC) (Author)
WEIL Philippe - Observatoire français des conjonctures économiques (Author)
Editor
US : Wiley-Blackwell
Volume
41
Number
2-3
Pages
245 - 284 p.
ISSN
00222879
Keywords
precautionary saving, risk aversion, intertemporal substitution
Abstract
EN
This paper examines how aversion to risk and aversion to intertemporal substitution determine the strength of the precautionary saving motive in a two-period model with Selden/Kreps–Porteus preferences. For small risks, we derive a measure of the strength of the precautionary saving motive that generalizes the concept of “prudence” introduced by Kimball (1990b). For large risks, we show that decreasing absolute risk aversion guarantees that the precautionary saving motive is stronger than risk aversion, regardless of the elasticity of intertemporal substitution. Holding risk preferences fixed, the extent to which the precautionary saving motive is stronger than risk aversion increases with the elasticity of intertemporal substitution. We derive sufficient conditions for a change in risk preferences alone to increase the strength of the precautionary saving motive and for the strength of the precautionary saving motive to decline with wealth.Within the class of constant elasticity of intertemporal substitution, constant-relative risk aversion utility functions, these conditions are also necessary.

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