Precautionary Saving and the Marginal Propensity to Consume out of Permanent Income

Christopher Carroll

No 8233, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D81 D91 (search for similar items in EconPapers)
Date: 2001-04
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Christopher D. Carroll, 2001. "Mathematica code for Precautionary Saving and the Marginal Propensity to Consume out of Permanent Income," QM&RBC Codes 39, Quantitative Macroeconomics & Real Business Cycles.
Published as Carroll, Christopher D. "Precautionary Saving and the Marginal Propensity to Consume Out of Permanent Income." Journal of Monetary Economics 56, 6 (September 2009): 780-90.

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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)
Software Item: Mathematica code for Precautionary Saving and the Marginal Propensity to Consume out of Permanent Income (2001)
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