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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets
Christopher D. Carroll, Karen E. Dynan, and Spencer D. Krane

Abstract: Recent empirical work on the strength of precautionary saving has yielded widely varying conclusions. The mixed findings may reflect a number of difficulties in proxying uncertainty, executing instrumental variables estimation, and incorporating theoretical restrictions into empirical models. For each of these problems, this paper uses existing best-practice techniques and some new strategies to relate unemployment probabilities from the Current Population Survey to net worth data from the Survey of Consumer Finances. We find that increases in unemployment risk do not boost saving by households with relatively low permanent income, but that a statistically significant precautionary effect emerges for households at a moderate level of income. This finding is robust to certain restrictions on the sample, but not robust across measures of wealth: We generally find a significant precautionary motive in broad measures of wealth that include home equity, but not in narrower subaggregates comprised only of financial assets and liabilities.

Keywords: Precautionary saving, life-cycle consumption under uncertainty, wealth accumulation

Full paper (437 KB PDF)

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Last update: April 30, 1999