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A Tractable Model of Buffer Stock Saving

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  • Christopher D. Carroll
  • Patrick Toche

Abstract

We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15265.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15265

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  1. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie57-1.
  2. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers, National Bureau of Economic Research, Inc 7271, National Bureau of Economic Research, Inc.
  3. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 51(3), pages 247-57, August.
  4. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 53-73, January.
  5. Jonathan A. Parker & Bruce Preston, 2005. "Precautionary Saving and Consumption Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 95(4), pages 1119-1143, September.
  6. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 21(3), pages 339-53, July.
  7. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics, EconWPA 9503003, EconWPA.
  8. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, National Bureau of Economic Research, Inc, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  9. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers, C.V. Starr Center for Applied Economics, New York University 94-24, C.V. Starr Center for Applied Economics, New York University.
  10. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 51(3), pages 239-46, August.
  11. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, Elsevier, vol. 87(2), pages 267-272, May.
  12. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 339-57, April.
  13. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers, National Bureau of Economic Research, Inc 5213, National Bureau of Economic Research, Inc.
  14. Jonathan B. Berk & Richard Stanton & Josef Zechner, 2010. "Human Capital, Bankruptcy, and Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 65(3), pages 891-926, 06.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Handling complexity within microfoundations macro
    by Mainly Macro in Mainly Macro on 2012-08-11 10:57:00
  2. Handling complexity within microfoundations macro
    by Mainly Macro in Mainly Macro on 2012-08-11 10:57:00
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Cited by:
  1. Gerlach, Petra & Merola, Rossana, 2013. "Consumption and Credit Constraints: A Model and Evidence for Ireland," Papers, Economic and Social Research Institute (ESRI) WP471, Economic and Social Research Institute (ESRI).
  2. Christopher D. Carroll & Olivier Jeanne, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," Working Paper Series, Peterson Institute for International Economics WP09-10, Peterson Institute for International Economics.
  3. repec:hal:wpaper:hal-00843150 is not listed on IDEAS
  4. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 1127, International Food Policy Research Institute (IFPRI).
  5. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers, International Monetary Fund 12/219, International Monetary Fund.
  6. Tomi T. Kortela, 2011. "On the costs of disability insurance," 2011 Meeting Papers, Society for Economic Dynamics 445, Society for Economic Dynamics.
  7. Carroll, Christopher D. & Slacalek, Jiri & Sommer, Martin, 2012. "Dissecting saving dynamics: Measuring wealth, precautionary, and credit effects," CFS Working Paper Series, Center for Financial Studies (CFS) 2012/10, Center for Financial Studies (CFS).
  8. Xavier Ragot & Edouard Challe, 2011. "Precautionary Saving over the Business Cycle," 2011 Meeting Papers, Society for Economic Dynamics 517, Society for Economic Dynamics.
  9. Gatt, William, 2014. "The determinants of household saving behaviour in Malta," MPRA Paper, University Library of Munich, Germany 57707, University Library of Munich, Germany.
  10. Michael Sattinger, 2010. "The Markov Consumption Problem," Discussion Papers, University at Albany, SUNY, Department of Economics 10-02, University at Albany, SUNY, Department of Economics.
  11. Piotr Bialowolski & Dorota Weziak-Bialowolska, 2014. "The Index of Household Financial Condition, Combining Subjective and Objective Indicators: An Appraisal of Italian Households," Social Indicators Research, Springer, Springer, vol. 118(1), pages 365-385, August.

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