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Inference on Buffer‐Stock Saving

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  • Hao Dong
  • Yuya Sasaki

Abstract

There is an ongoing debate about the buffer‐stock saving hypothesis. This paper develops a formal test of the hypothesis by examining the sub‐unity of the marginal propensity to consume out of permanent income (MPCP). Our test relies on a novel estimator of the average derivative of a nonparametric consumption model, using constructed measures of latent permanent income shocks that accommodate nonparametric income distributions. Following Li and Vuong (1998), we use a Kotlarski‐based approach to account for asymmetric errors, which is crucial for testing buffer‐stock behavior. Applied to the US Panel Study of Income Dynamics (PSID) data, our test rejects a unit MPCP, providing empirical support for buffer‐stock saving.

Suggested Citation

  • Hao Dong & Yuya Sasaki, 2026. "Inference on Buffer‐Stock Saving," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 41(4), pages 425-445, June.
    • Handle: RePEc:wly:japmet:v:41:y:2026:i:4:p:425-445
    DOI: 10.1002/jae.70048
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