Title: The effects of precautionary saving motives on (S,s) bands for home purchases
Abstract: In a buffer-stock model with both nondurable and durable goods, the optimal policy for consumption of the durable good follows an (S,s) rule, where the precise trigger point at which the consumer decides to make a purchase depends on both the anticipated risk of unemployment and the available stock of liquid assets. In this paper I evaluate whether microeconomic data are consistent with this type of behavior by examining the relationship between income uncertainty, liquid assets and the characteristics of the (S,s) bands for home purchases using data from the Panel Study of Income Dynamics. The results demonstrate that, as predicted by the model, the home purchase trigger values are negatively related to the level of income uncertainty faced by households. In addition, liquid assets held by the household before and after a home purchase are significant and positively related to both the home purchase trigger and target values, suggesting that households are indeed concerned about their balance sheet positions after the home purchase takes place. Although the target values do not seem to be affected by uncertainty, there is some evidence that the overall (S,s) bandwidth widens in response to greater income uncertainty.
Publication Year: 2003
Publication Date: 2003-07-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 4
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