Essays on households' consumption and saving decisions.

Abstract

In this thesis I contribute to the applied study of households' consumption and saving behaviour. In the first chapter I introduce and explain why it is relevant to understand how households react to income shocks in terms of their consumption and saving decisions. The second chapter is inspired by a recent paper by Krueger and Perri (2011), who argue that the observed response of household wealth to income shocks, which is smaller over long periods, provides evidence in favour of the classic permanent-income model with perfect financial markets. Whether a model with financial market imperfections, however, such as the standard incomplete-markets model with liquidity constraints, can also generate such a wealth response crucially depends on the importance of precautionary wealth accumulation. I structurally estimate a model with a precautionary- savings motive and show that it can generate the observed wealth responses in the data. I further show that the wealth responses to income shocks do not allow us to rule out financial market imperfections. In the third chapter I extend the analysis, studying empirically what can be learned from international evidence on the way in which households react to income. I use detailed panel data from newly available surveys of Chile, Spain and the United States. Although it compares three different countries with dissimilar levels of development in their financial markets, the evidence suggests that the amount of precautionary savings in these economies is low and that household behaviour is not strongly influenced by the presence of borrowing constraints. The structural estimation for all countries suggests a low target level of wealth resulting from high levels of impatience or low levels of risk aversion. In the fourth chapter I extend the analysis to the real estate properties owned by the households. I revisit the Italian data, building on Kaplan and Violante (2014) who have argued that a substantial fraction of wealthy households with illiquid wealth, such as real estate, behave as hand-to-mouth consumers. In exploring the data, I find that, in the Italian sample, households which adjust their illiquid wealth show responses to income shocks like permanent-income consumers. Instead households which do not adjust their illiquid wealth, and whose behaviour in general can thus not be characterised by the first order conditions, show responses to income shocks which suggest a stronger precautionary-saving motive, such as wealthy hand-to-mouth consumers might be expected to show. The fifth chapter provides the conclusions of the thesis.