Precautionary saving and consumption growth in Taiwan

Consumption and income have both grown rapidly in Taiwan over the past forty years, with younger birth cohorts experiencing faster growth. The long upward trend in consumption presents a strong challenge to the consumption smoothing predictions of the Permanent Income Hypothesis. Household survey data from 1976-1996 are used to examine the extent to which precautionary savings behaviour can explain this rapid consumption growth in an environment with high levels of savings. We find evidence for a strong precautionary motive in Taiwan, with levels of prudence much higher than found in the United States and United Kingdom. These high rates of prudence explain much of the rapid consumption growth, while the faster consumption growth of younger cohorts is attributed in part to their greater participation in industries with more earnings risk. (c) 2005 Elsevier Inc. All rights reserved.