Using survey data from a representative sample of Dutch households, we estimate the strength of precautionary saving by eliciting subjective expectations on future consumption. Expected consumption risk is positively correlated with self-employment and income risk and negatively with age. We insert these subjective expectations (rather than consumption realizations, as in the existing literature) in an Euler equation for consumption and estimate the degree of prudence by associating expected consumption risk with expected consumption growth. Robust OLS and IV estimates indicate a coefficient of relative prudence of around 2. We obtain similar results via partial identification methods using weak assumptions.

The theory of intertemporal choice predicts that the cross-sectional variance of the marginal utility of consumption is equal to its own lag plus a constant and a random component. Using general preference specifications and some assumptions about the nature of the random component, we provide an explicit test of this hypothesis. Our approach circumvents the necessity to identify a pure age profile of the cross-sectional variance of consumption and yields a well-specified statistical test. This test is applied to data from the United States, the United Kingdom, and Italy. The results are remarkably consistent with the restrictions implied by the theory of intertemporal consumption choices.

Previous tests for liquidity constraints using consumption Euler equations have frequently split the sample on the basis of wealth, arguing that low-wealth consumers are more likely to be constrained. We propose alternative tests using different and more direct information on borrowing constraints obtained from the 1983 Survey of Consumer Finances. In a first stage we estimate probabilities of being constrained, which are then utilized in a second sample, the Panel Study of Income Dynamics, to estimate switching regression models of the Euler equation. Our estimates indicate stronger excess sensitivity associated with the possibility of liquidity constraints than the sample splitting approach.