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

Abstract

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.