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Optimal Intertemporal Consumption Under Uncertainty

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Author Info
Gary Chamberlain (Harvard University)
Charles A. Wilson (New York University)
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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Publisher 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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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

This item is featured on the following reading lists:

  1. Recursive Macroeconomic Theory
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. [Downloadable!] (restricted)
  2. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April. [Downloadable!] (restricted)
  3. Bewley, Truman, 1980. "The permanent income hypothesis and short-run price stability," Journal of Economic Theory, Elsevier, vol. 23(3), pages 323-333, December. [Downloadable!] (restricted)
  4. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Martin Floden, 2008. "Aggregate Savings When Individual Income Varies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 70-82, January. [Downloadable!] (restricted)
    Other versions:
  2. Partha Chatterjee & Malik Shukayev, 2006. "Convergence in a Stochastic Dynamic Heckscher-Ohlin Model," Working Papers 06-23, Bank of Canada. [Downloadable!]
  3. Halko, Marja-Liisa, 2003. "Buffer funding of unemployment insurance in a dynamic labour union model," Research Discussion Papers 24/2003, Bank of Finland. [Downloadable!]
  4. Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA. [Downloadable!]
    Other versions:
  5. Marja-Liisa Halko, 2004. "Buffer funding of unemployment insurance in a dynamic labour union model," Macroeconomics 0404030, EconWPA. [Downloadable!]
  6. James M. Nason & John H. Rogers, 2003. "The present-value model of the current account has been rejected: round up the usual suspects," International Finance Discussion Papers 760, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. Francisco Covas, 2005. "Uninsured Idiosyncratic Production Risk with Borrowing Constraints," Working Papers 05-26, Bank of Canada. [Downloadable!]
    Other versions:
  8. Olson, Lars & Roy, Santanu, 2005. "Theory of Stochastic Optimal Economic Growth," Working Papers 28601, University of Maryland, Department of Agricultural and Resource Economics. [Downloadable!]
  9. George-Marios Angeletos & Laurent E. Calvet, 2001. "Incomplete Markets, Growth, and the Business Cycle," Harvard Institute of Economic Research Working Papers 1910, Harvard - Institute of Economic Research. [Downloadable!]
  10. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal Taxation without State-Contingent Debt," Economics Working Papers 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001. [Downloadable!]
    Other versions:
  11. Subir Chattopadhyay, 2003. "Stationary Equilibrium In An Altruistic Two Sector Economy," Working Papers. Serie AD 2003-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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