Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2011-10-10
Number: 11-144/2
Author-Name: Lorenzo Pozzi
Author-Workplace-Name: Erasmus University Rotterdam
Title: The Time-Varying Volatility of Earnings and Aggregate Precautionary Savings
Abstract: Micro data are used for the US over the period 1968 - 1992 to estimate time-varying specifications for the conditional variance of earnings of individual households. Specifications estimated are standard and quadratic ARCH  and GARCH processes. The cross-sectional mean of the estimated time-varying uncertainty of individual households is found to have a significant impact on aggregate consumption growth implying that earnings uncertainty and precautionary saving motives matter for the aggregate economy. The estimation of a buffer stock model of consumption with time-varying earnings uncertainty provides an estimated precautionary component in aggregate consumption growth. The importance of this component is found to decrease over the sample period, a result which is in line with the existing literature.
Classification-JEL: E21
Keywords: aggregate consumption, earnings, precaution, ARCH errors
File-Url: https://papers.tinbergen.nl/11144.pdf
File-Format: application/pdf
File-Size: 442635 bytes
Handle: RePEc:tin:wpaper:20110144