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School of Economics and Finance

No. 825: Buffer-stock saving and households' response to income shocks

Giulio Fella , Queen Mary University of London
Serafin Frache , Banco Central del Uruguay
Winfried Koeniger , University of St.Gallen

July 20, 2017

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We use the Italian Survey of Household Income and Wealth, a rather unique dataset with a long time dimension of panel information on consumption, income and wealth, to structurally estimate a buffer-stock saving model. We exploit the information contained in the joint dynamics of income, consumption and wealth to quantify the degree of insurance against income risk implied by the estimated model. We find that Italian households insure between 89 and 95 percent of a transitory and between 7 and 9 percent of a permanent income shock. Our estimates are in line with empirical estimates for the same dataset, that do not impose any model structure on the consumption process. This suggests that Italian households do not have access to significant insurance beyond that implied by self-insurance.

J.E.L classification codes: D91, E21

Keywords:Consumption, Wealth, Incomplete markets, Insurance