In this paper we model the evolution ofincome risk and consumption growth.We decompose the time series innovation of the income process intoits common and cohort-specific components. From these we compute conditional variances which are used as separate risk terms in a consumptiongrowthequation. U singalongtimeseriesofB ritishhouseholddatawe ndstrongevidenceofprecautionarysaving. Specically, afterallowing fordemographicand labourmarketstatus, there is an independent role for income risk in explaining consumption growth. R atherthanthecomponentthatis commonacross cohorts, however, it is thecohort-specicelementthatis important in determining changes in consumption growth.This result points to a failure of between-cohort insurance mechanisms.
Authors
CPP Co-Director
James is Senior Research Fellow and Professor of Economics at Manchester, working on broad issues in the economics of retirement, savings and health.
CPP Co-Director
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.
Research Fellow Ca' Foscari University of Venice
Agar is a Research Fellow of the IFS and a Professor in the Department of Economics at the University of Venice,
Working Paper details
- DOI
- 10.1920/wp.ifs.1999.9919
- Publisher
- IFS
Suggested citation
J, Banks and R, Blundell and A, Brugiavini. (1999). Risk pooling, precautionary saving and consumption growth. London: IFS. Available at: https://ifs.org.uk/publications/risk-pooling-precautionary-saving-and-consumption-growth (accessed: 13 May 2024).
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