Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis

  title={Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis},
  author={C. Carroll},
  journal={Macroeconomics eJournal},
  • C. Carroll
  • Published 1996
  • Economics
  • Macroeconomics eJournal
  • This paper argues that the typical household's saving is better described by a traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient. In the traditional model, consumption growth is determined solely by tastes; in contrast, buffer-stock consumers set average consumption growth equal to average labor income growth, regardless of tastes. The model can explain three… CONTINUE READING
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