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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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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. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  2. 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.
  3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  4. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, vol. 87(2), pages 267-272, May.
  5. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  6. Jonathan B. Berk & Richard Stanton & Josef Zechner, 2010. "Human Capital, Bankruptcy, and Capital Structure," Journal of Finance, American Finance Association, vol. 65(3), pages 891-926, 06.
  7. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
  8. Jonathan A. Parker & Bruce Preston, 2004. "Precautionary Saving and Consumption Fluctuations," Working Papers 140, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  9. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
  10. 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.
  11. 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.
  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. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  14. 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.
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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. 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).
  2. repec:hal:wpaper:hal-00843150 is not listed on IDEAS
  3. Carroll, Christopher D. & Jeanne, Olivier, 2009. "A tractable model of precautionary reserves, net foreign assets, or sovereign wealth funds," CFS Working Paper Series 2009/15, Center for Financial Studies (CFS).
  4. Gerlach, Petra & Merola, Rossana, 2013. "Consumption and Credit Constraints: A Model and Evidence for Ireland," Papers WP471, Economic and Social Research Institute (ESRI).
  5. Michael Sattinger, 2010. "The Markov Consumption Problem," Discussion Papers 10-02, University at Albany, SUNY, Department of Economics.
  6. Carroll, Christopher & Slacalek, Jiri & Sommer, Martin, 2012. "Dissecting saving dynamics: measuring wealth, precautionary and credit effects," Working Paper Series 1474, European Central Bank.
  7. Xavier Ragot & Edouard Challe, 2011. "Precautionary Saving over the Business Cycle," 2011 Meeting Papers 517, Society for Economic Dynamics.
  8. 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, vol. 118(1), pages 365-385, August.
  9. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers 12/219, International Monetary Fund.
  10. Tomi T. Kortela, 2011. "On the costs of disability insurance," 2011 Meeting Papers 445, Society for Economic Dynamics.

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