The impact of temperature shocks on households’ saving behaviour in rural Ethiopia

We examine the impact of temperature shocks on the saving behaviour of rural households in Ethiopia. Two rounds of survey data and time-series temperature data from Climate Engine/Terra Climate are used for this analysis. We find that the probability of household saving falls following an increase in temperature anomalies, measured by standardized deviations, and this impact is channelled through time and risk preferences. More specifically, temperature shocks increase risk-taking and impatience, both of which are linked to a reduced probability of saving. As a result, preserving long-term welfare requires the promotion of commitment-based saving instruments, including saving mechanisms with automatic deductions at harvest time. Our heterogeneity analysis demonstrates that, compared to their counterparts, poor households’ saving behaviour and those without credit access are more affected by temperature shocks. Therefore, policies aimed at mitigating the adverse effects of climate change on household financial outcomes, such as saving, should prioritize these groups.