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 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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Author:Christopher D. Carroll
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2009,16
Series (Serial Number):CFS working paper series (2009, 16)
Document Type:Working Paper
Year of Completion:2009
Year of first Publication:2009
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2009/08/14
Tag:Buffer Stock Saving; Consumption; Permanent Income Hypothesis; Precautionary Saving; Risk; Uncertainty
GND Keyword:Sparen
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht