An Exact Analysis of Precautionary Consumption Growth

Jeanne Commault

Working Papers from HAL

Abstract: While macro models increasingly incorporate substantial risk, the theoretical knowledge about the effect of uncertainty on consumption growth consists of intuitions from the second order log-linearized Euler equation. I show that the derivation of the log-linearized Euler equation is flawed in that it does not consist in linearizing an Euler equation but in linearizing an ad-hoc mathematical identity. I prove exactly that uncertainty raises consumption growth and makes consumption depart from a random walk. I also prove that this precautionary consumption growth is decreasing in assets, and in transitory and permanent income when income is a transitory-permanent process.

Keywords: Precautionary behavior; Log-linearized Euler equation; Random walk hypothesis (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-cwa
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Working Paper: An Exact Analysis of Precautionary Consumption Growth (2022)
Working Paper: An Exact Analysis of Precautionary Consumption Growth (2022)
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