THE NATURE OF PRECAUTIONARY WEALTH

This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for con sumers with predictably greater income uncertainty. However, the appar ent pattern of precautionary wealth is not consistent with a standard parameterization of the life cycle model in which consumers are patien t enough to begin saving for retirement early in life; wealth is estim ated to be far less sensitive to uncertainty than implied by that mode l. Instead, our results suggest that over most of their working life t ime, consumers behave in accordance with the 'buffer-stock' models of saving described in Carroll (1992, 1997) or Deaton (1991), in which co nsumers hold wealth principally to insulate consumption against near-t erm fluctuations in income.