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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. Jonathan A. Parker & Bruce Preston, 2005. "Precautionary Saving and Consumption Fluctuations," American Economic Review, American Economic Association, vol. 95(4), pages 1119-1143, September.
  2. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  3. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
  4. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
  5. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  6. Jonathan B. Berk & Richard Stanton & Josef Zechner, 2007. "Human Capital, Bankruptcy and Capital Structure," NBER Working Papers 13014, National Bureau of Economic Research, Inc.
  7. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  8. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  9. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  10. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, vol. 87(2), pages 267-272, May.
  11. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  12. 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 5213, National Bureau of Economic Research, Inc.
  13. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-53, July.
  14. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
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  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. Michael Sattinger, 2010. "The Markov Consumption Problem," Discussion Papers 10-03, University at Albany, SUNY, Department of Economics.
  2. Tomi T. Kortela, 2011. "On the costs of disability insurance," 2011 Meeting Papers 445, Society for Economic Dynamics.
  3. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers 1127, International Food Policy Research Institute (IFPRI).
  4. repec:hal:wpaper:hal-00843150 is not listed on IDEAS
  5. Christopher D. Carroll & Olivier Jeanne, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," Working Paper Series WP09-10, Peterson Institute for International Economics.
  6. Carroll, Christopher D. & Slacalek, Jiri & Sommer, Martin, 2012. "Dissecting saving dynamics: Measuring wealth, precautionary, and credit effects," CFS Working Paper Series 2012/10, Center for Financial Studies (CFS).
  7. Xavier Ragot & Edouard Challe, 2011. "Precautionary Saving over the Business Cycle," 2011 Meeting Papers 517, Society for Economic Dynamics.
  8. Gerlach, Petra & Merola, Rossana, 2013. "Consumption and Credit Constraints: A Model and Evidence for Ireland," Papers WP471, Economic and Social Research Institute (ESRI).
  9. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers 12/219, International Monetary Fund.

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