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

  • Christopher D Carroll

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 contract 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 of Carroll and Summers [1991]; the consumption/income divergence first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 371.

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Date of creation: Jul 1990
Date of revision: Aug 1996
Handle: RePEc:jhu:papers:371
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