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Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis

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  • Christopher D. Carroll
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    This paper argues that the typical household's saving is better described by a "buffer-stock" version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient. In the traditional model, consumption growth is determined solely by tastes. In contrast, buffer-stock consumers set average consumption growth equal to average labor income growth, regardless of tastes. The model can explain three empirical puzzles: the "consumption/income parallel" documented by Carroll and Summers; the "consumption/income divergence" first documented in the 1930s; and the stability of the household age/wealth profile over time despite the unpredictability of idiosyncratic wealth changes.

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    File URL: http://hdl.handle.net/10.1162/003355397555109
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    Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

    Volume (Year): 112 (1997)
    Issue (Month): 1 ()
    Pages: 1-55

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    Handle: RePEc:oup:qjecon:v:112:y:1997:i:1:p:1-55.
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