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  3. American Economic Review
  4. September 2005
  5. Precautionary Saving and Consumption Fluctuations

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Precautionary Saving and Consumption Fluctuations

  • Jonathan A. Parker
  • Bruce Preston
American Economic Review
vol. 95, no. 4, September 2005
(pp. 1119–1143)
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Abstract

This paper uses the consumption Euler equation to derive a decomposition of consumption growth into four sources. These four sources 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 household-level data, we implement this decomposition for the average growth rate of consumption expenditures on nondurable goods in the United States from 1982 to 1997. 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.

Citation

Parker, Jonathan, A., and Bruce Preston. 2005. "Precautionary Saving and Consumption Fluctuations." American Economic Review, 95 (4): 1119–1143. DOI: 10.1257/0002828054825556

Additional Materials

JEL Classification

  • E21 Macroeconomics: Consumption; Saving; Wealth