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The Buffer-Stock Consumption Model with Endogenous Income Shifts

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Author Info
Nikolaj Malchow-Møller (Centre for Economic and Business Research (CEBR) and University of Southern Denmark)
Bo Thorsen (Royal Veterinary and Agricultural University and Centre for Economic and Business Research (CEBR))

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Abstract

Credit-constrained households must use savings both to smooth consumption and to finance productive investments. This non-separability between consumption and production decisions is ignored in the standard intertemporal buffer-stock consumption model where income growth is exogenous. This paper develops an intertemporal model of household consumption and investment in the presence of credit constraints and income uncertainty. Investment options are modelled as irreversible, indivisible, and non-stationary, allowing for endogenous income growth. The resulting behaviour is markedly different from that of the standard buffer-stock model.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Macroeconomics.

Volume (Year): 5 (2005)
Issue (Month): 1 ()
Pages: 1108-1108
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Handle: RePEc:bep:maccon:v:5:y:2005:i:1:p:1108-1108

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Related research
Keywords: Credit constraints buffer-stock saving endogenous growth indivisible and irreversible investments uncertainty

Find related papers by JEL classification:
D9 - Microeconomics - - Intertemporal Choice and Growth

References listed on IDEAS
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    Other versions:
  3. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
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  4. Morduch, Jonathan, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-14, Summer. [Downloadable!] (restricted)
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  5. Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June. [Downloadable!] (restricted)
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  6. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December. [Downloadable!] (restricted)
  7. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August. [Downloadable!] (restricted)
  8. Heller, Walter Perrin & Starr, Ross M, 1979. "Capital Market Imperfection, the Consumption Function, and the Effectiveness of Fiscal Policy," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 455-63, August. [Downloadable!] (restricted)
  9. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  10. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May. [Downloadable!] (restricted)
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  11. Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January. [Downloadable!] (restricted)
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  12. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January. [Downloadable!] (restricted)
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  13. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 180-94, April.
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