A Theory of the Consumption Function, with and without Liquidity Constraints
This paper argues that the modern stochastic consumption model, in which impatient consumers face uninsurable labor income risk, matches Milton Friedman's (1957) original description of the Permanent Income Hypothesis much better than the perfect foresight or certainty equivalent models did. The model can explain the high marginal propensity to consume, the high discount rate on future income, and the important role for precautionary behavior that were all part of Friedman's original framework. The paper also explains the relationship of these questions to the Euler equation literature, and argues that the effects of precautionary saving and liquidity constraints are often virtually indistinguishable.
Volume (Year): 15 (2001)
Issue (Month): 3 (Summer)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bertaut, Carol C. & Haliassos, Michael, 1997.
"Precautionary portfolio behavior from a life-cycle perspective,"
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- Carol C. Bertaut & Michael Haliassos, 1996. "Precautionary portfolio behavior from a life-cycle perspective," International Finance Discussion Papers 542, Board of Governors of the Federal Reserve System (U.S.).
- John Campbell & Angus Deaton, 1989.
"Why is Consumption So Smooth?,"
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- Christopher D Carroll, 1990.
"Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis,"
Economics Working Paper Archive
371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
- Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
- 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.
- repec:cup:macdyn:v:5:y:2001:i:2:p:255-71 is not listed on IDEAS
- Allen, Todd W. & Carroll, Christopher D., 2001.
"Individual Learning About Consumption,"
Cambridge University Press, vol. 5(02), pages 255-271, April.
- Todd W. Allen & Christopher D. Carroll, 2001. "Individual Learning About Consumption," NBER Working Papers 8234, National Bureau of Economic Research, Inc.
- Todd W Allen & Christopher D Carroll, 2001. "Individual Learning About Consumption," Economics Working Paper Archive 444, The Johns Hopkins University,Department of Economics.
- Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
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