An Approximate Consumption Function

Abstract:     
This paper proposes an approximation to the consumption function in the buffer-stock model. The approximation is based on the analytic properties of the consumption function in the buffer-stock model. In such model, the consumption function is increasing and concave and its derivative is bounded from above and below. We compare the approximation with the consumption function obtained using the endogenous grid point algorithm and show that using the former or the latter for estimating the Euler equation leads to very similar results.

Number of Pages in PDF File: 43

Keywords: Buffer stock model of saving, Computational methods, Approximation methods and estimation

JEL Classification: C63, D12, E21

working papers series