Buffer‐stock Saving and Households' Response to Income Shocks

Abstract

We use the Italian Survey of Household Income and Wealth, a rather unique dataset with a long time dimension of panel information on consumption, income and wealth, to structurally estimate a buffer-stock saving model. We exploit the information contained in the joint dynamics of income, consumption and wealth to quantify the degree of insurance against income risk. The estimated model implies that Italian households can insure between 89 and 95 percent of a transitory and between 7 and 9 percent of a permanent income shock. Compared to existing empirical estimates for the same dataset, our findings suggest that Italian households do not have access to significant insurance beyond self-insurance.

Precautionary Saving: A Review of the Empirical Literature

“…As we have shown above, consumers save due to precautionary reasons to protect themselves against future unexpected events and their prudent behaviour is reinforced, among other factors, by larger income risk, stronger risk aversion, weaker distaste for intertemporal substitution, higher interest rates and greater persistence of income shocks (Weil, ). As regards the latter, the more persistent the shocks, the greater the uncertainty faced by the individual; therefore, the persistence of income shocks magnifies precautionary saving (Guiso et al ., ; Alessie and Lusardi, ; Benito, ; Jappelli and Pistaferri, , ; Blundell et al ., ; Carroll, ; Kaplan and Violante, ; or Fella et al ., ).…”

“…On the other hand, Fella et al . () estimate a structural buffer‐stock savings model using a panel from the SHIW, finding that Italian households can insure between 7% and 9% of a permanent income shock and between 89% and 95% of a transitory shock. Therefore, this suggests that Italian households have substantially less insurance possibilities against permanent shocks than the USA counterparts, who can insure 22–36% of a permanent shock according to the estimates by Kaplan and Violante () and Blundell et al .…”

Consumption Tax Cuts in a Recession

“…The survey is conducted every other year since 1987 with a sample size of about 8,000 households in each wave. SHIW is particularly suitable for addressing questions about households' consumption and saving dynamics (see, for instance, Krueger and Perri, 2011 and Fella et al., 2020) as it combines measures of different sources of income, detailed categories of financial and housing wealth, and expenditures in nondurable and durable goods for a long panel of households.…”

How Do Households Respond to Income Shocks?

“…Similar to our study, they find that the adjustment in real wealth (vehicles in particular, in their case) is a crucial feature in their data, and they construct a model with consumer durables to account for these facts. In a closely related paper, Fella et al (2020) use a fully specified partial-equilibrium consumption-savings model as well as indirect inference (in the same spirit as Guvenen and Smith (2014) in their study of income risk and partial consumption insurance) to argue that precautionary saving is important to match the wealth regression coefficients over a longer time horizon. 6 Finally, our work and the papers cited so far focus on the role of consumption selfinsurance through financial markets in the face of stochastic labor income shocks.…”