SAVING AND INCOME SMOOTHING - EVIDENCE FROM PANEL-DATA

In this paper we use data from a panel of Dutch households to investig ate the behavior of savings. As in Campbell (1987), we examine whether the pattern of savings is consistent with the predictions of the rati onal expectations-permanent income model, We consider one important pr ediction of the model: whether savings anticipate future income change s. We test the predictions of the permanent income model in several wa ys, First we propose some informal tests that exploit directly the inf ormation on expected future income changes available in the data. We t hen perform a test of the model by setting up a vector autoregression (VAR) in terms of savings and income changes and by using Euler equati ons expressed in terms of savings, The empirical evidence shows that i n all the specifications used in this paper, the permanent income mode l is rejected, Contrary to the evidence from U.S. macro data, we do no t find that the 'excess sensitivity' of consumption to income is respo nsible for the rejection of the model.