TAILIEUCHUNG - A Direct Test of the Buffer-Stock Model of Saving

In short, the literature still lacks a convincing test of the buffer-stock model. In this paper we use a survey question on precautionary wealth available in the 2002 Bank of Italy Survey on Household Income and Wealth (SHIW) to propose a direct test of buffer stock behavior. The question asks people how much savings they think they need for future emergencies, and is similar to a question contained in the 1995 and 1998 Surveys of Consumer Finances described in Kennickell and Lusardi (2004). We interpret this question as providing information on target wealth in a buffer-stock model, and test the proposition that people with wealth-income ratio below target. | CSEF Centre for Studies in Economics and Finance Working Paper no. 150 A Direct Test of the Buffer-Stock Model of Saving Tullio Jappelli Mario Padula and Luigi Pistaferri December 2005 lb ini University of Naples Federico II University of Salerno Bocconi University Milan CSEF - Centre for Studies in Economics and Finance - University of Salerno 84084 FISCIANO SA - ITALY Tel. 39 089 96 3167 3168 - Fax 39 089 96 3167 - e-mail csef@ Ji5 ẩP Centre for Studies in Economics and Finance Working Paper no. 150 A Direct Test of the Buffer-Stock Model of Saving Tullio Jappelli Mario Padula and Luigi Pistaferri Abstract Recent models with liquidity constraints and impatience emphasize that consumers use savings to buffer income fluctuations. When wealth is below an optimal target consumers try to increase their buffer stock of wealth by saving more while if wealth is above target they increase consumption. This important implication of the buffer stock model of saving has not been subject to direct empirical testing. We derive from the model an appropriate theoretical restriction and test it using data on working-age individuals drawn from the 2002 Italian Survey of Household Income and Wealth. One of the most appealing features of the survey is that respondents report the amount of wealth held for precautionary purposes which we interpret as target wealth in a buffer stock model. The test results do not support buffer stock behavior even among population groups that are more likely a priori to display such behavior. The saving behavior of young households is instead consistent with models in which impatience relative to prudence is not as high as in buffer stock models. Acknowledgements We thank Chris Carroll for extensive discussions and suggestions and for comments Erich Battistin Annamaria Lusardi Jon Skinner Steve Pischke and seminar participants at the 2005 NBER Summer Institute the 7th Workshop of the RTN Project on Economics of Aging in Venice the University of

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