Buffer-Stock Saving and Households’ Response to Income Shocks

We exploit information on the joint dynamics of household labor income, consumption and wealth in the Italian Survey of Household Income and Wealth to structurally estimate a buffer‐stock saving model. We compare the degree of consumption smoothing implied by the model to the corresponding empirical estimates based on the same dataset. We estimate that Italian households smooth 12 percent of permanent income shocks in the data which is comparable to the model counterpart of 11 percent. This result contrasts with existing evidence, and our own findings in this paper, of substantially more consumption smoothing in US data.