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Empir Econ (2014) 46:329360 DOI 10.1007/s00181-012-0677-y
Precautionary saving under liquidity constraints: evidence from Italy
Manuela Deidda
Received: 20 November 2011 / Accepted: 19 November 2012 / Published online: 19 January 2013 Springer-Verlag Berlin Heidelberg 2013
Abstract I empirically investigate precautionary savings under liquidity constraints in Italy using a unique indicator of subjective variance of income growth to measure the strength of the precautionary motive for saving, and a variety of survey-based indicators of liquidity constraints. The main contribution of the paper is twofold. First of all, I attempt to differentiate between the standard precautionary saving caused by uncertainty from the one due to liquidity constraints using an endogenous switching regression approach, which allows me to cope with endogeneity issues associated with sample splitting techniques. Second, I move one step further with respect to previous studies on consumption behaviour by taking explicitly expected liquidity constraints into account. I eventually found the precautionary motive for savings to be stronger for those households who face binding constraints, or expect constraints to be binding in the future. Indeed, a complementarity relation exists between precautionary savings and liquidity constraints.
Keywords Consumption Precautionary saving Liquidity constraints
Switching regression.
JEL Classication E21 C21
M. Deidda (B)
Centre for North South Economic Research (CRENoS), Via S. Giorgio 12, 09124 Cagliari, Italye-mail: [email protected]
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330 M. Deidda
1 Introduction
The departure from the life cycle permanent income hypothesis (LCPIH) and from the certainty equivalence (CE) restrictive assumption1 has allowed researchers to take into consideration the role played by liquidity constraints and precautionary behaviour in shaping households consumption and saving decisions. Indeed, the popularity of the CE model has been mainly due to its analytical tractability rather than to its ability to t reality. Empirical evidence has shown that consumption follows income closely. Both liquidity constraints and myopia (Zeldes 1989; Hall and Mishkin 1982; Jappelli and Pistaferri 2000) are among the causes of the excessive sensitivity of consumption to income. Moreover, the CE specication does not leave any room for reaction to risk. 2 In this framework, the shape of the lifetime path of consumption is independent from the shape of the income path (Browning and Lusardi 1996). However, risk is not neutral to consumption decisions, so that people save in a precautionary way to...