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Manuela Deidda (Università di Roma Tor Vergata)
Precautionary savings under liquidity
constraints: evidence from Italy
In this paper, I empirically investigate precautionary savings under liquidity
constraints in Italy using household panel data. Following Jappelli-Pistaferri
(2000) I analyze a 3 year (1989-1993) rotating panel of the Bank of Italy Survey
of Household Income and Wealth (SHIW). I exploit a unique indicator of
subjective variance of income growth, which allows to measure the strength of
precautionary motive for saving, and a variety of survey-based indicators of borrowing
constraints. However, my analysis deviates from Jappelli-Pistaferri in
two aspects. First of all, I attempt to differentiate between the standard precautionary
saving motive caused by uncertainty from the one due to liquidity
constraints. I address this issue by using an endogenous switching regression
approach, which allows me to cope with endogeneity issues associated with sample
split techniques. Secondly, I try to cope with the downward bias in the estimation
of the parameter associated to the subjective variance of income growth,
using a direct measure of risk aversion. I eventually found precautionary motive
for savings to be stronger for constrained than for unconstrained agents. A
complementarity relation indeed exists between precautionary saving and liquidity
constraints. Moreover, the introduction of a survey-based measure of risk
aversion allow a better estimation of the coefficient associated to the subjective
measure of the variance of income growth.
Key words: precautionary savings, liquidity constraints, switching regression.
*Department of Economics, University of Rome "Tor Vergata", Via Columbia 2, Rome.