A Tractable Model of Buffer Stock Saving

36 Pages Posted: 25 Aug 2009 Last revised: 18 Sep 2010

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Patrick Toche

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Date Written: August 2009

Abstract

We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice.

Suggested Citation

Carroll, Christopher D. and Toche, Patrick, A Tractable Model of Buffer Stock Saving (August 2009). NBER Working Paper No. w15265, Available at SSRN: https://ssrn.com/abstract=1459566

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
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410-516-7602 (Phone)
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Patrick Toche

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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