Extended Model of Precautionary Saving Based on Recursive Utility

How to measure the uncertainty is one of the most important problems in the theory of precautionary saving. This paper establishes an extended model of precautionary saving based on recursive utility (RU-PSM). The new model takes the volatility of consumption, interest rate and the return of risky asset as the measure of the uncertainty and extends the model introduced by Deaton. The new model also implies that the coefficient of risk aversion and the elasticity of intertemporal substitution affect the growth of consumption together.