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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.

Suggested Citation

  • Christopher D. Carroll & Patrick Toche, 2009. "A Tractable Model of Buffer Stock Saving," NBER Working Papers 15265, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15265
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    1. Handling complexity within microfoundations macro
      by Mainly Macro in Mainly Macro on 2012-08-11 15:57:00
    2. Handling complexity within microfoundations macro
      by Mainly Macro in Mainly Macro on 2012-08-11 15:57:00

    Citations

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    Cited by:

    1. Edouard Challe & Xavier Ragot, 2016. "Precautionary Saving Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 126(590), pages 135-164, February.
    2. Mr. Christopher Carroll & Mr. Martin Sommer & Mr. Jiri Slacalek, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," IMF Working Papers 2012/219, International Monetary Fund.
    3. Jeanne, Olivier & Carroll, Christopher, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," CEPR Discussion Papers 7449, C.E.P.R. Discussion Papers.
    4. William Gatt, "undated". "The determinants of household saving behaviour in Malta," CBM Working Papers WP/03/2014, Central Bank of Malta.
    5. Petra Gerlach-Kristen & Rossana Merola, 2019. "Consumption and credit constraints: a model and evidence from Ireland," Empirical Economics, Springer, vol. 57(2), pages 475-503, August.
    6. Sattinger, Michael, 2011. "The Markov consumption problem," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 409-416.
    7. Rabitsch, Katrin & Schoder, Christian, 2016. "Buffer stock savings in a New-Keynesian business cycle model," FinMaP-Working Papers 64, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    8. repec:hal:spmain:info:hdl:2441/54k1p7hdq38odb1k39k1rdm8di is not listed on IDEAS
    9. Schoder, Christian, 2020. "A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis," Economic Modelling, Elsevier, vol. 86(C), pages 117-132.
    10. Christian Schoder, 2015. "A Keynesian Dynamic Stochastic Labor-Market Disequilibrium model for business cycle analysis," IMK Working Paper 157-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    11. Tomi T. Kortela, 2011. "On the costs of disability insurance," 2011 Meeting Papers 445, Society for Economic Dynamics.
    12. Mariella Nenova, 2022. "Households’ Consumption Pattern and Saving – Evidence for the First Year of the Covid-19 Pandemic in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 3-22.
    13. Merike Kukk, 2014. "Distinguishing the components of household financial wealth: the impact of liabilities on assets in Euro Area countries," Bank of Estonia Working Papers wp2014-2, Bank of Estonia, revised 10 Oct 2014.
    14. Merike Kukk & Karsten Staehr, 2015. "Macroeconomic factors in corporate and household saving. Evidence from Central and Eastern Europe," Bank of Estonia Working Papers wp2015-5, Bank of Estonia, revised 30 Dec 2015.
    15. Christian Schoder, 2017. "An estimated Dynamic Stochastic Disequilibrium model of Euro-Area unemployment," Working Papers 1725, New School for Social Research, Department of Economics.
    16. Christian Schoder, 2017. "A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis," Working Papers 1701, New School for Social Research, Department of Economics.
    17. Christian Schoder, 2015. "Methodological, internal and ontological inconsistencies in the conventional micro-foundation of post-Keynesian theory," Working Papers 1518, New School for Social Research, Department of Economics.
    18. 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).
    19. 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: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 118(1), pages 365-385, August.
    20. Levenko, Natalia, 2020. "Perceived uncertainty as a key driver of household saving," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 126-145.

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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