A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)
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.
|Date of creation:||Jul 2001|
|Date of revision:|
|Publication status:||published as Carroll, Christopher D. "A Theory Of The Consumption Function, With And Without Liquidity Constraints," Journal of Economic Perspectives, 2001, v15(3,Summer), 23-45.|
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- 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.
- Campbell, John Y & Deaton, Angus, 1989.
"Why Is Consumption So Smooth?,"
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Wiley Blackwell, vol. 56(3), pages 357-73, July.
- Carroll, Christopher D, 1997.
"Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis,"
The Quarterly Journal of Economics,
MIT Press, vol. 112(1), pages 1-55, February.
- 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.
- Carol C. Bertaut & Michael Haliassos, 1996.
"Precautionary Portfolio Behavior from a Life-Cycle Perspective,"
- Bertaut, Carol C. & Haliassos, Michael, 1997. "Precautionary portfolio behavior from a life-cycle perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1511-1542, June.
- 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.).
- Todd W Allen & Christopher D Carroll, 2001.
"Individual Learning About Consumption,"
Economics Working Paper Archive
444, The Johns Hopkins University,Department of Economics.
- repec:cup:macdyn:v:5:y:2001:i:2:p:255-71 is not listed on IDEAS
- 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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