Precautionary Saving and the Marginal Propensity to Consume Out of Permanent Income

21 Pages Posted: 13 Apr 2001

See all articles by Christopher D. Carroll

Christopher D. Carroll

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

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Date Written: April 2001

Abstract

Because the budget constraint implies that consumption must eventually fully adjust to permanent shocks, intuition suggests that consumption-smoothers will have an immediate marginal propensity to consume of one out of permanent shocks. However, this paper shows that if consumers are impatient and experience both transitory and permanent income shocks, the immediate marginal propensity to consume out of permanent shocks is strictly less than one, because buffer-stock savers have a target wealth-to-permanent-income ratio; for a consumer starting at the target ratio, a positive shock to permanent income moves their actual wealth- to-permanent-income ratio below the target, temporarily boosting the saving rate.

JEL Classification: D81, D91, E21

Suggested Citation

Carroll, Christopher D., Precautionary Saving and the Marginal Propensity to Consume Out of Permanent Income (April 2001). Available at SSRN: https://ssrn.com/abstract=266761

Christopher D. Carroll (Contact Author)

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