An Exact Analysis of Precautionary Consumption Growth

Jeanne Commault

SciencePo Working papers Main 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
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03591010
References: Add references at CitEc
Citations:

Downloads: (external link)
https://shs.hal.science/halshs-03591010/document (application/pdf)

Related works:
Working Paper: An Exact Analysis of Precautionary Consumption Growth (2022)
Working Paper: An Exact Analysis of Precautionary Consumption Growth (2022)
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:hal:spmain:halshs-03591010

Access Statistics for this paper

More papers in SciencePo Working papers Main from HAL
Bibliographic data for series maintained by Contact - Sciences Po Departement of Economics ().