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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 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 [1991]; the 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5788.

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Date of creation: Oct 1996
Date of revision:
Publication status: published as Quarterly Journal of Economics, Vol. 107, no. 1 (February 1997): 1-56.
Handle: RePEc:nbr:nberwo:5788
Note: EFG ME
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