A Tractable Model of Buffer Stock Saving

Christopher Carroll () and Patrick Toche

No 15265, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice.

JEL-codes: C61 D11 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-rmg
Date: 2009-08
Note: AP
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