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An Approximate Consumption Function

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Abstract

This paper proposes an approximation to the consumption function in the buffer-stock model. The approximation is based on the analytic properties of the consumption function in the buffer-stock model. In such model, the consumption function is increasing and concave and its derivative is bounded from above and below. We compare the approximation with the consumption function obtained using the endogenous grid point algorithm and show that using the former or the latter for estimating the Euler equation leads to very similar results.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 199.

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Date of creation: 01 Jul 2008
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Handle: RePEc:sef:csefwp:199

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Keywords: Buffer stock model of saving; Computational methods; Approximation methods and estimation;

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References

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  1. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  2. Carroll, Christopher D., 2006. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," Economics Letters, Elsevier, vol. 91(3), pages 312-320, June.
  3. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
  4. Feigenbaum, James, 2005. "Second-, third-, and higher-order consumption functions: a precautionary tale," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1385-1425, August.
  5. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  6. S. Boragan Aruoba & Jesus Fernandez-Villaverde & Juan Francisco Rubio-Ramirez, 2003. "Comparing solution methods for dynamic equilibrium economies," Working Paper 2003-27, Federal Reserve Bank of Atlanta.
  7. Christopher D. Carroll, 2009. "Theoretical Foundations of Buffer Stock Saving," 2009 Meeting Papers 210, Society for Economic Dynamics.
  8. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  9. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc.
  10. Martin Browning & Sule Alan, 2006. "Estimating Intertemporal Allocation Parameters using Simulated Expectation Errors," Economics Series Working Papers 284, University of Oxford, Department of Economics.
  11. Sule Alan & Martin Browning, 2003. "Estimating Intertemporal Allocation Parameters using Simulated Residual Estimation," CAM Working Papers 2003-03, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  12. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
  13. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014, December.
  14. Den Haan, Wouter J & Marcet, Albert, 1994. "Accuracy in Simulations," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 3-17, January.
  15. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  16. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
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Cited by:
  1. Feigenbaum, James, 2008. "Information shocks and precautionary saving," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3917-3938, December.

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