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Optimal Intertemporal Consumption Under Uncertainty

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  • Gary Chamberlain

    (Harvard University)

  • Charles A. Wilson

    (New York University)

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    Abstract

    We analyze the optimal consumption program of an infinitely-lived consumer who maximizes the discounted sum of utilities subject to a sequence of budget constraints where both the interest rate and his income are stochastic. We show that if the income and interest rate processes are sufficiently stochastic and the long run average rate of interest is greater than or equal to the discount rate, then consumption eventually grows without bound with probability one. We also establish conditions under which the borrowing constraints must be binding and examine how the income process affects the optimal consumption program. (Copyright: Elsevier)

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    File URL: http://dx.doi.org/10.1006/redy.2000.0098
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    Bibliographic Info

    Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

    Volume (Year): 3 (2000)
    Issue (Month): 3 (July)
    Pages: 365-395

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    Handle: RePEc:red:issued:v:3:y:2000:i:3:p:365-395

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    Related research

    Keywords: uncertainty; consumption; permanent income hypothesis;

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    References

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    1. Bewley, Truman F., 1980. "The permanent income hypothesis and long-run economic stability," Journal of Economic Theory, Elsevier, vol. 22(3), pages 377-394, June.
    2. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
    3. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
    4. Yaari, Menahem E., 1976. "A law of large numbers in the theory of consumer's choice under uncertainty," Journal of Economic Theory, Elsevier, vol. 12(2), pages 202-217, April.
    5. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September.
    6. Bewley, Truman, 1980. "The permanent income hypothesis and short-run price stability," Journal of Economic Theory, Elsevier, vol. 23(3), pages 323-333, December.
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    1. Recursive Macroeconomic Theory

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