Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/43257
Authors: 
Carroll, Christopher D.
Year of Publication: 
2009
Series/Report no.: 
CFS Working Paper 2009/16
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.
Subjects: 
Risk
Uncertainty
Consumption
Precautionary Saving
Buffer Stock Saving
Permanent Income Hypothesis
JEL: 
D81
D91
E21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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