Melbourne Institute of Applied Economic and Social Research - Research Publications

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Author: Broadway, Barbara × Author: de New, John ×

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    Keep calm and consume? Subjective uncertainty and precautionary savings
    Broadway, B ; Haisken-DeNew, JP (Springer (part of Springer Nature), 2019-07)
    This paper estimates the effect of income uncertainty on assets held in accounts and cash, and finds substantial empirical evidence for precautionary savings. Using household-level panel data, it explicitly distinguishes between ‘real’ income uncertainty the household is actually exposed to, and ‘perceived’ income uncertainty. It finds that the latter substantially increases precautionary savings above and beyond the effect of ‘real’ income uncertainty. The effect of subjective economic uncertainty on behaviour has only begun to show up after the Great Recession. The economic crisis appears to have shifted households’ willingness to forgo current consumption for insurance pruposes. Our results imply that households save above their optimal level especially after and during a crisis, potentially exacerbating the economic downturn.
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    Keep calm and consume? Subjective uncertainty and precautionary savings
    BROADWAY, B ; Haisken-Denew, J (Melbourne Institute, The University of Melbourne, 2017-07)
    This paper estimates the effect of income uncertainty on assets held in accounts and cash, and finds substantial empirical evidence for precautionary savings. Using household-level panel data, it explicitly distinguishes between ‘real’ income uncertainty the household is actually exposed to, and ‘perceived’ income uncertainty. It finds that the latter substantially increases precautionary savings above and beyond the effect of ‘real’ income uncertainty. The effect of subjective economic uncertainty on behaviour has only begun to show up after the Great Recession. The economic crisis appears to have shifted households’ willingness to forgo current consumption for insurance pruposes. Our results imply that households save above their optimal level especially after and during a crisis, potentially exacerbating the economic downturn.
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    The Importance of Economic Expectations for Retirement Entry
    Broadway, B ; de New, JP (WILEY, 2021-03)
    We estimate hazard rates of retirement entry as a function of the option value of work. Individuals’ economic expectations about the future economy are represented as expectations about rates of return on superannuation retirement savings. These are incorporated into the option value of work, through which they can impact on the timing of retirement entry. We find that individuals have an incentive not to leave the labour force when they expect high returns on their pension savings, while still working. In a scenario where individuals expect negative returns, the average annual hazard rate of retirement entry of 6.9 percent is increased by 0.2 percentage points (or 2.9 percent) compared to a scenario where individuals expect strong positive returns. Rudimentary calculations find an implied tax revenue loss of $26.7 million. Given that the expectations in this model are short‐term and merely perceived, holding real economic conditions constant, this effect is sizable.