The Effect of Parameter Uncertainty on Consumption, Wealth, and Welfare

Michael Sampson ()
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Michael Sampson: Professor Emeritus, Department of Economics Concordia University, Canada

Annals of Economics and Finance, 2022, vol. 23, issue 1, 1-10

Abstract: This paper looks at precautionary saving when income follows a random walk where the trend parameter μ is unknown. Agents use Bayesian econometrics to determine their beliefs about μ. Parameter uncertainty about μ is shown to dominate all other sources of uncertainty that agents face. We derive a closed-form solution to the model and show that this parameter uncertainty has a big impact on consumption, precautionary savings, and welfare. The effect of this parameter uncertainty on wealth is shown to be permanent.

Keywords: Parameter Uncertainty; Bayesian econometrics; Precautionary Savings; Consumption; Wealth (search for similar items in EconPapers)
JEL-codes: C11 C22 E21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2022:v:23:i:1:sampson

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