Buffer-Stock Saving in a Krusell-Smith World

29 Pages Posted: 11 Feb 2014

See all articles by Christopher D. Carroll

Christopher D. Carroll

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

Jiri Slacalek

European Central Bank (ECB)

Kiichi Tokuoka

Ministry of Finance - Japan

Date Written: January 27, 2014

Abstract

A large body of microeconomic evidence supports Friedman (1957)'s proposition that household income can be reasonably well described as having both transitory and permanent components. We show how to modify the widely-used macroeconomic model of Krusell and Smith (1998) to accommodate such a microeconomic income process. Our incorporation of substantial permanent income shocks helps our model to explain a substantial part of the large degree of empirical wealth heterogeneity that is unexplained in the baseline Krusell and Smith (1998) model, even without heterogeneity in preferences.

Keywords: microfoundations of macroeconomics, household income process, aggregate uncertainty, wealth inequality

JEL Classification: D12, D31, D91, E21

Suggested Citation

Carroll, Christopher D. and Slacalek, Jiri and Tokuoka, Kiichi, Buffer-Stock Saving in a Krusell-Smith World (January 27, 2014). Available at SSRN: https://ssrn.com/abstract=2385921 or http://dx.doi.org/10.2139/ssrn.2385921

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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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
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Jiri Slacalek

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Kiichi Tokuoka

Ministry of Finance - Japan ( email )

3-1-1 Kasumigaseki
Chiyoda-ku
Tokyo, 100-8940
Japan

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