The Buffer-Stock Model and the Aggregate Propensity to Consume: A Panel-Data Study of the Us States
41 Pages Posted: 10 Aug 2004
Date Written: July 2004
Abstract
We simulate a buffer-stock model of consumption, explicitly aggregate over consumers, and estimate aggregate marginal propensities to consume out of current and lagged income using simulated data generated by the model. We calculate the predicted marginal effects of changing persistence of income shocks, aggregate-level uncertainty, and individual-level risk. Next, we estimate marginal propensities for US states using panel-data methods. We find effects of persistence that clearly correspond to the predictions of the model and, while the effect of aggregate uncertainty cannot be determined precisely, indicators of individual level uncertainty have strong effects consistent with the model. Overall, the buffer-stock model clearly helps explain differences in consumer behavior across states.
Keywords: Buffer-stock, consumption, precautionary saving
JEL Classification: E21
Suggested Citation: Suggested Citation