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

65 Pages Posted: 14 Apr 1997 Last revised: 10 May 2000

See all articles by Christopher D. Carroll

Christopher D. Carroll

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

Date Written: October 1996

Abstract

This paper argues that the typical household's saving is better described by a "bufferstock" version than by the 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 empirical puzzles: the [1991]; the the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes.

Suggested Citation

Carroll, Christopher D., Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis (October 1996). NBER Working Paper No. w5788, Available at SSRN: https://ssrn.com/abstract=3878

Christopher D. Carroll (Contact Author)

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