Precautionary saving and the marginal propensity to consume out of permanent income

Christopher Carroll

No 2009/16, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon experiencing a permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent shocks, the optimal marginal propensity to consume out of permanent shocks (the MPCP) is strictly less than 1, because buffer stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its target, temporarily boosting saving.

Keywords: Risk; Uncertainty; Consumption; Precautionary Saving; Buffer Stock Saving; Permanent Income Hypothesis (search for similar items in EconPapers)
JEL-codes: D81 D91 E21 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (76)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/43257/1/61075579X.pdf (application/pdf)

Related works:
Journal Article: Precautionary saving and the marginal propensity to consume out of permanent income (2009)
Working Paper: Precautionary Saving and the Marginal Propensity To Consume Out of Permanent Income (2009)
Working Paper: Precautionary Saving and the Marginal Propensity to Consume out of Permanent Income (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200916

Access Statistics for this paper

More papers in CFS Working Paper Series from Center for Financial Studies (CFS) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics (econstor@zbw-workspace.eu).