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Rationalizing Seven Consumption-Saving Puzzles in a Unified Framework

  • Kevin X.D. Huang

    ()

    (Department of Economics, Vanderbilt University)

  • Frank Caliendo

    ()

    (Department of Economics, Utah State University)

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.

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File URL: http://www.accessecon.com/pubs/VUECON/vu07-w16.pdf
File Function: First version, 2007
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0716.

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Date of creation: Oct 2007
Handle: RePEc:van:wpaper:0716
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  1. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-88, September.
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  10. Frank Caliendo & Kevin X.D. Huang, 2007. "Overconfidence and Consumption over the Life Cycle," Vanderbilt University Department of Economics Working Papers 0712, Vanderbilt University Department of Economics.
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  25. Venti, Steven F & Wise, David A, 1998. "The Cause of Wealth Dispersion at Retirement: Choice or Chance?," American Economic Review, American Economic Association, vol. 88(2), pages 185-91, May.
  26. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
  27. Frank Caliendo & Kevin X. D. Huang, 2007. "Overconfidence in financial markets and consumption over the life cycle," Working Papers 07-3, Federal Reserve Bank of Philadelphia.
  28. Bullard, James & Feigenbaum, James, 2007. "A leisurely reading of the life-cycle consumption data," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2305-2320, November.
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