Risk and Savings: a Taxonomy

Risk may induce precautionary saving but it can also reduce saving. The theoretical literature recognizes both possibilities, but favors a positive effect (both for developed and developing countries); the empirical literature is divided, reporting (small) positive effects for developed economies and (large) negative effects for developing countries. We show in a 2-period model how the effect of risk on savings depends not only on preferences but also on the type of risk.