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Rationalizing Seven Consumption-Saving Puzzles in a Unified Framework

Author

Listed:
  • Kevin X.D. Huang

    () (Department of Economics, Vanderbilt University)

  • Frank Caliendo

    () (Department of Economics, Utah State University)

Abstract

Empirical evidence suggests that it may cost time, effort, and resources to properly implement a saving plan, though such cost may differ across individual consumers. We document seven facts on macroeconomic consumption and saving over the life cycle, and we enrich a simple life-cycle model by costly saving implementation to explain these facts. This friction is the sole and common mechanism in our model for rationalizing this series of facts, as the model abstracts from all existing mechanisms that are known to help explain some of them. The implementation costs in our model are small, yet they help resolve these macroeconomic consumption and saving puzzles in a simple and unified way.

Suggested Citation

  • Kevin X.D. Huang & Frank Caliendo, 2007. "Rationalizing Seven Consumption-Saving Puzzles in a Unified Framework," Vanderbilt University Department of Economics Working Papers 0716, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:0716
    as

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    File URL: http://www.accessecon.com/pubs/VUECON/vu07-w16.pdf
    File Function: First version, 2007
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    References listed on IDEAS

    as
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    Cited by:

    1. Feigenbaum, James & Caliendo, Frank N. & Gahramanov, Emin, 2011. "Optimal irrational behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 77(3), pages 285-303, March.
    2. repec:pit:wpaper:368 is not listed on IDEAS

    More about this item

    Keywords

    Overconfidence; consumption; life cycle; time inconsistency; hump shape; elasticity of intertemporal substitution;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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