Consumption and Precautionary Saving: An Empirical Analysis under Both Financial and Environmental Risks

Authors: Donatella Baiardi, Matteo Manera, Mario Menegatti

Year: 2011

Series: FEEM Working Paper  n.2011.062

ISSN: 2037-1209

Keywords: Consumption, Precautionary Saving, Financial Risk, Environmental Risk, Prudence, Relative Risk Aversion, Uncertainty

JEL n.: D81, E21, Q50

 

Abstract

This paper studies the empirical relationship between consumption and saving under two different sources of uncertainty: financial risk and environmental risk. The analysis is carried out using time series data for six advanced economies in the period 1965-2007. The results support the theoretical conclusions that both financial risk alone and the interaction between financial and environmental risks affect consumption. Moreover, we suggest a solution to some shortcomings which concern the empirical analysis performed with one-argument utility functions. Finally, we provide new estimates of indexes of relative risk aversion and relative prudence, and relative preference of environmental quality.

Consumption and Precautionary Saving: An Empirical Analysis under Both Financial and Environmental Risks