Precautionary saving and the marginal propensity to consume out of permanent income

The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon 
The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon experiencing a permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent shocks, the optimal marginal propensity to consume out of permanent shocks (the MPCP) is strictly less than 1, because buffer stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its target, temporarily boosting saving. Keywords: Risk, Uncertainty, Consumption, Precautionary Saving, Buffer Stock Saving, Permanent Income Hypothesis.
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Metadaten
Author:Christopher D. Carroll
URN:urn:nbn:de:hebis:30-68357
Parent Title (German):CFS working paper series ; 2009, 16
Series (Serial Number):CFS working paper series (2009, 16)
Document Type:Working Paper
Language:English
Date of Publication (online):2009/08/14
Year of first Publication:2009
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2009/08/14
Tag:Buffer Stock Saving ; Consumption ; Permanent Income Hypothesis; Precautionary Saving ; Risk ; Uncertainty
HeBIS PPN:214929426
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:D81 Criteria for Decision-Making under Risk and Uncertainty
D91 Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 Consumption; Saving; Wealth
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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