Income Uncertainty and Precautionary Saving: Evidence from Household Rotating Panel Data∗

This paper analyses precautionary saving associated with income risk. I model income dynamics decomposing the innovation into its idiosyncratic, cohort-specific and aggregate components, as in Banks, Blundell and Brugiavini (1999). However, compared to their repeated cross-sections, I show how my rotating panel (the Spanish family expenditure survey) can be exploited to identify the idiosyncratic process. The conditional variances of those shocks are included as risk terms in a consumption growth equation. Rather than the aggregate component, I find the cohort-specific risk to effect consumption; this supports the precautionary motive for saving and implies a failure of between-cohort insurance mechanisms.