Consumption and precautionary saving: An empirical analysis under both financial and environmental risks

This paper studies the empirical relationship between consumption and saving under two different sources of uncertainty: financial risk and environmental risk. The analysis is carried out using time series data for six advanced economies in the period 1965-2007.The results support the theoretical conclusions that both financial risk alone and the interaction between financial and environmental risks influence consumption. Moreover, we suggest a solution to some shortcomings which affect the empirical analysis performed with one-argument utility functions. Finally, we provide new estimates of indexes of relative risk aversion and relative prudence, as well as relative preference of environmental quality.

► Effects of financial and environmental risks on consumption and saving ► Analysis of six advanced economies over the period 1965-2007 ► Impact of financial risk on consumption growth is positive and significant. ► Interaction between financial and environmental risks affects precautionary saving. ► New estimates of the indexes of relative risk aversion and prudence are proposed.