Title

Precautionary Saving and Consumption Fluctuations

Author(s)

Jonathan A. Parker Jonathan Parker (Princeton University and NBER)

Bruce Preston Bruce Preston (Columbia University)

Abstract

This paper uses the consumption Euler equation to derive a decomposition of consumption growth into four sources. These are new information and three sources of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Using data on the expenditures of households, we implement the decomposition for the average growth rate of consumption expenditures on nondurable goods in the U.S. from the beginning of 1982 to the end of 1997. Incomplete markets for trading consumption in future states lead to statistically significant and countercyclical movements in expected consumption growth: consumption growth is expected to be higher when the unemployment rate is high. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured.

Creation Date

2004-03

Section URL ID

WWSEcon

Paper Number

dp227.pdf

URL

https://mitsloan.mit.edu/shared/ods/documents/?DocumentID=4175

File Function

Jel

E21

Keyword(s)

Suppress

false

Series

4