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A tractable model of buffer stock saving

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  • Carroll, Christopher D.
  • Toche, Patrick

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 Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2009/14.

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Date of creation: 2009
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Handle: RePEc:zbw:cfswop:200914

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Keywords: Risk; Uncertainty; Precautionary Saving; Buffer Stock Saving;

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References

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  1. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  2. 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.
  3. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2345, C.E.P.R. Discussion Papers.
  4. 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.
  5. 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.
  6. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 981-92, July.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  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. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, Elsevier, vol. 87(2), pages 267-272, May.
  13. 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.
  14. 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.
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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. Michael Sattinger, 2010. "The Markov Consumption Problem," Discussion Papers 10-03, University at Albany, SUNY, Department of Economics.
  2. 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.
  3. 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.
  4. Edouard Challe & Xavier Ragot, 2013. "Precautionary Saving over the Business Cycle," PSE Working Papers hal-00843150, HAL.
  5. 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).
  6. 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).
  7. Gatt, William, 2014. "The determinants of household saving behaviour in Malta," MPRA Paper 57707, University Library of Munich, Germany.
  8. Tomi T. Kortela, 2011. "On the costs of disability insurance," 2011 Meeting Papers 445, Society for Economic Dynamics.
  9. repec:hal:wpaper:hal-00843150 is not listed on IDEAS
  10. 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).
  11. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics," IMF Working Papers 12/219, International Monetary Fund.

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