Buffer stock saving and the life-cycle/permanent income hypothesis (1997)
| Venue: | Quarterly Journal of Economics |
| Citations: | 140 - 5 self |
BibTeX
@ARTICLE{Carroll97bufferstock,
author = {Christopher D. Carroll},
title = {Buffer stock saving and the life-cycle/permanent income hypothesis},
journal = {Quarterly Journal of Economics},
year = {1997},
pages = {1--56}
}
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Abstract
This paper argues that the typical household’s saving is better described by a “bufferstock” 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 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 “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.
